If you don’t reclaim all the VAT you are entitled to, you could be losing hundreds of pounds a year. If that continues over a number of years, you’re looking at thousands. According to accounting software giant, Sage UK, reporting on the results of recent research, over a third of UK SMEs could make ‘significant savings’ on their VAT returns. More than half the business owners surveyed believed they might be around £500 or more better off.
The problem is the complexity of the VAT rules and the frequency of change. Busy entrepreneurs think they don’t have time to acquire the knowledge they need or to keep up with the changes. Having outsourced bookkeepers helps of course. It is part of their job to understand VAT and keep up to date. But they can only work with the information you give them, so it is important to keep careful records and proof of your purchases and expenses.
Mandatory or Voluntary Registration
The current turnover threshold for VAT registration is £79,000. If your business has not yet reached that level you don’t have to register, charge VAT, and pay it on to HMRC. But you may wish to register anyway as there are some advantages. Being VAT registered is seen as a sort of coming of age for a young business. It may attract more clients and customers because they believe you are more likely to have the experience and expertise they need.
Another advantage of initial registration is being able to reclaim VAT on many of your expenses in previous years. For goods you still hold, you can claim on purchases made up to four years prior to registering. This can include major asset purchases such as computers and other IT items, desks and other office furniture. It can also include the consumables you keep in your stationery cupboard.
Because you can only reclaim VAT on services bought during the six months prior to registration, there can be significant advantages to registering soon after setting up your business. Then you can reclaim on the legal and accountancy fees connected with the set-up, any services related to your premises and setting up your equipment, and so on.
Talking it Over Helps
Whether you are VAT registered, need to register or are just considering registration, it would be a good idea to discuss the implications of VAT with your bookkeepers. For those already registered or about to, you need to make sure you are or will be reclaiming everything possible, or whether it might be more advantageous to be on the Flat Rate scheme. If you are not sure whether to register before it becomes mandatory, discussing the pros and cons with someone independent of the company can often help you make the decision.