Cultural Enterprise Office

"VAT is a simple tax" said Anthony Barber, Chancellor of the Exchequer on the introduction of VAT on April Fool's Day, 1973. However, very few people have found that to be the case. Angela Bedi explores VAT registration and how simple it is for creative businesses today.

Even the most basic principles of VAT are often misunderstood. Examples of some of the most commonly expressed misbeliefs include:

• My accountant will tell me at the end of the financial year end if I have to register or not.
• I have to already be registered to get the VAT back on my setup costs.
• VAT only applies if I make a profit.
• I'm not over the threshold for VAT therefore I can't register.
• I need an accountant to submit my VAT returns.

Value Added Tax

VAT stands for Value Added Tax. It is a tax that is imposed on every sale of goods or services in the UK by businesses involved in the VAT regime. VAT can be charged at three different rates – standard, reduced and zero. Some goods are exempt.

VAT is a self-assessed, transaction-based tax for which you are primarily responsible.

There is no one size fits all approach. Each business is different. You may be in the same field as someone else but you will have different staff levels, in-house resources, overheads, customer profiles and work pressures unique to you. These should always be taken into consideration when thinking about registering for VAT.

There are essentially two reasons for registering for VAT:

1. Because you are required to do so – you have exceeded one of the relevant VAT threshold.
2. Because it is advantageous for you to do so – in which case you would register voluntarily.

If you are not yet registered for VAT you should be very clear that neither of the above apply to you.

Because it works in a supply chain, everyone that is VAT registered can recover the VAT on their purchases. For example, any materials you buy in or sub-contracting you pay VAT. If you are charged VAT, you can recover it so it brings down the net cost to you of buying those things in. This is known as input tax.

Effectively you pass on VAT costs. It just comes in and out, in and out, in and out until somebody who isn't VAT registered doesn’t have the ability to recover it.

Once registered you have to do regular VAT returns. On the return you are asked:

• What your net sales figure is
• What purchases you’ve made and if you were charged VAT on those purchases
• How much you owe HMRC.

For example, if your net sales and outputs were £100, you would owe HMRC £20. However if your purchases and inputs were £50, and included £10 of VAT, you could recover that and would therefore actually owe HMRC £10 (£20 minus £10).

For more information about compulsory and voluntary VAT registration, please see the Am I required to register for VAT? or Would it benefit me to be registered for VAT? FAQs.

Pre-registration expenses

Setting up a business can be expensive and involve significant costs on which VAT may be charged, e.g. stock, office equipment, professional fees. Many people think you must already be registered for VAT to get this back. But that is not necessarily correct.

On registering for VAT there is an opportunity to include any VAT charged on goods and services bought prior to registration in your first VAT return. There are strict time limits, and the usual evidence requirements, but it does mean you may not have to rush into voluntary registration just to recover the VAT on your new computer, for example.

Registering for VAT

Once you have decided you either need, or want, to register for VAT it can make life easier if you stop and consider:

What your 'effective date' should be

This is the date from which you will:

• Be registered for VAT.
• Have to start to charge VAT on any or all appropriate sales.

Ask yourself:

• If you're halfway through a contract will that cause an issue?
• Is it easier to have it from the start of your financial year?
• Are there grounds for requesting that it is backdated?

What 'VAT return stagger' would suit you best

A stagger is the period covered by your VAT return. This can be quarterly or monthly. Consider the cycles in your business, and choose what works best for you. Should you be requesting monthly VAT returns? If quarterly, is there a particular quarter end that would either suit you very well, or would be best avoided?

If any of the various schemes would be more appropriate for you

Cash accounting, annual accounting or VAT flat rate schemes. You don't have to use these straight away but it may be simpler for you, and your customers, if you do.

VAT Record Keeping Requirements

Whether you are keeping manual records, using a spreadsheet you designed for yourself, or a standard accounting package, ensure the records you are keeping will meet the requirements for your business in relation to VAT.

If you're not sure, some quick and simple advice at the start could prevent major headaches further down the line. This is particularly relevant if your VAT position is likely to be complicated by business or non-business apportionments, partial exemption or overseas sales.

Penalties

No one likes to end on a sour note, but there are quite a few penalties available to HMRC to ensure compliance with legislation. It is up to you to:

• Know the correct liability of any supply you make.
• Account for any VAT as appropriate, in the correct VAT return and at the appropriate time.
• Only recover as much VAT as you are entitled.

You cannot, generally, rely on others, even your accountant. However, some penalties can be mitigated if you acted reasonably and accepted advice you were entitled to consider would be correct.

HMRC publish lots of free information online and provide a backup helpline. Although it would be disingenuous of me not to point out the old adage, 'rubbish in, rubbish out'. So before you think of asking for help please ensure you have provided all of the relevant information, and ask the right questions, or you may end up with the wrong answer.

Further Information

• HMRC – VAT: Getting Started
• HMRC – VAT: How VAT Works

This Guide was written following the Approaching VAT event in March 2015.

Disclaimer: We want to keep you in the know, so we offer a wide selection of useful resources. But Cultural Enterprise Office isn’t responsible for the advice and information of external organisations in this document. So if you have any questions, please contact the specific organisation directly.