Most small business owners struggle with the decision as to register their organization for VAT. There are considerations about how VAT is calculated and what the VAT thresholds are that might apply to their business or company.
When are you obliged to register for VAT?
Since registration for VAT is not required for companies that turning over a total sales volume of less than 82,000 GBP, it’s not a cut and dry decision for many running their own companies.
For organizations that are exceeding the 82,000 GBP cap and do not elect to file VAT there are some pretty severe penalties. Most accounting software programs will help the company to understand when they are coming close to the VAT threshold, and will help them file the correct funds.
Beyond that decision point, understanding how VAT works is not too complicated. There is a responsibility for each vendor to add VAT at twenty percent to any item sold. This revenue is collected expressly on behalf of Her Majesty’s Revenue and Customs. Each quarter, the collections on behalf of HMRC are remitted by the business owner.
A Practical Example…
However, most businesses buy things in addition to selling things. When they buy things, they will probably owe VAT. When they calculate the revenues they’ve collected for HMRC, they should subtract any VAT they owed on behalf of another. In an example where the vendor has collected 1,000 GBP for HMRC in a given quarter, and has made a purchase resulting in 500 GBP owed in VAT, they would remit 500 GBP to HMRC.
In this way, there is a financial benefit to registering for the VAT. However, there’s also a branding element at stake in the decision making process. By deciding not to register for VAT, you effectively choose to inform the entire UK that your business isn’t netting more than 82,000 GBP per annum.
So why would you not want to register for VAT? There’s an impression that the paperwork is overwhelming, and while that can be true, many accounting programs work out the details and print the required forms for the business.
What’s the next step? Probably register for VAT. Here’s how to do it in 5 simple steps.