With Brexit looming, tax registration has been in the news lately – paying taxes might become more complicated for sellers who sell digital products or services (such as dating apps, podcasts, and games) to customers outside the UK. Old regulations allowed them to pay VAT for EU countries directly to HMRC, but as of April, this practice has ended and international sellers will now need to register for VAT in both the EU and the UK. Sellers who neglect to do this may face steep ﬁnes, but it is estimated that the vast majority haven’t followed the warnings yet.
If recent news has got you thinking about taxes and you don’t yet have a VAT number for your business, it’s important to keep an eye on whether or not you meet the threshold for registration. VAT registration is essential for any business selling £85,000 or more of taxable goods and services within a 12 month rollover period, and also applies if you expect your turnover to be as much in a 30-day window. Below are some important tax tips to keep in mind if you’re a small business owner. If you’re outside of the UK, these speciﬁcs may not apply to you, but many VAT systems operate in a similar way.
Keep an eye on tax law
The threshold for applying for VAT changes constantly, so keep an eye out for changing tax laws and make sure you know where you are in relation to it. Once you pass it, you’ll need a tax number so you can start charging taxes and begin paying them. If you go over this threshold temporarily and don’t think you’ll exceed it again, you can apply for an exception – however if you’re near the threshold a lot, keep an eye out for when to register. Registering voluntarily once you are near the threshold may be a wise idea, since those who go over the threshold without registering may face a backlog of taxes to pay along with ﬁnes for registering late.
Exemptions from VAT
In the UK, once you register for VAT, you’ll likely need to charge the standard 20% on what you’re selling and remit payments to HMRC. However, certain categories of goods and services don’t need additional VAT charged on them, such as books, certain food items, and children’s clothing. Additionally, many goods and services only qualify for 5% VAT, such as boiler repair and solar panels. If you think what you’re sellling may fall into one of these categories, it’s best to look at the list of rates to see if your products are tax exempt.
Be mindful that you may still need to register for VAT though, even if you don’t need to charge it. If the items you sell are tax exempt but you purchase more than £85,000 for business purposes from VAT registered suppliers, you’ll have to register.
How to Register
You can register for VAT online, and when you do so you’ll be able to decide whether you will submit your own returns, or whether someone else (an accountant, for example) will do it on your behalf. Once you register, you’ll get a VAT certiﬁcate delivered to your online account, unless you’ve opted to register by mail. If someone else is handling your registration, your certiﬁcate will come by mail in this case as well.
Have your bank information handy when you register, as well as information about turnover and business activities. Once you register, the date you do it is called your “eﬀective date of Registration” and you’ll have to pay any VAT you’ve accumulated after this date.
Reclaiming VAT on Business Purchases
Tax isn’t all bad news – a bonus of registering for VAT is that you can reclaim VAT on business purchases you make, including those you made up to four years before you registered. You’ll need supporting documentation (like receipts and purchase dates) and will need to be able to explain how the purchase relates to your business. VAT on services can only be claimed up to six months prior to registration.
Going forward, you’ll be able to reclaim taxes on goods and services that are business purchases – but make sure they are legitimate business needs and not also personal. For example, you may claim some of the VAT back from utility bills if you work from home, but may only claim the percentage that applies to your business. So if 20% of your home is oﬃce space, you can only claim 20% of the VAT on utilities. Business entertainment costs aren’t eligible for VAT deductions – so take your clients out for lunch, but don’t expect to be able to write oﬀ the tax!
Keep your Account Up to Date
If the name or address of your business changes, or ownership of your business changes hands, you must update your VAT account to avoid facing ﬁnes. If you change your bank details, you will need to update your account two weeks in advance of the change, either online or via post using a VAT484 form. If there are any other major changes to your business that you think might be relevant to your tax account, it’s better to err on the side of caution and do a little research to ﬁnd out if it does.
VAT registration can seem complicated, so if you’re unsure, it’s best to get help to ensure you’re following all the regulations properly. You may ﬁnd that after getting help for a while, you’re able to do it on your own – or you may decide that you’d rather pay someone else to do it instead of worrying about ﬁnes. However you decide to register, being proactive about learning the rules will help you ensure you’re charging the correct amount of tax, and claiming the amounts you’re entitled to.