If you hear someone moaning about all the burdensome admin they have to do to keep their business afloat, the chances are they will include VAT in their long list of woes. But did you know that HMRC will pay you back the VAT that you spend?
VAT is a tax that is added to an invoice you raise and is paid by your customer. Some products, like helicopters and houseboats, books and children’s clothes are zero-rated and some products and services are exempt. These include property, land and buildings, education and health services amongst many others. Check the HMRC website for an up to date list, and check the difference between zero rated and exempt. Other goods and services attract VAT at a percentage of the sale price, currently 20% except for electricity, gas and other energy devices and others, which are currently rated at 5%. This may all change in the years after Brexit because I suppose we can go crazy and set our own rates now.
I’ve spent many happy Sunday afternoons musing the logic that is VAT rules – my prized collection of Koi carp is charged at 20% VAT because they are ornamental fish in my garden pond. However, if I decide to eat them then they are zero-rated. Interesting conversation with my supplier, and with the VAT inspector when I invite him for dinner. I feel like Hannibal Lecter.
Anyway, if you raise an invoice on your customer (and you are registered for VAT) then you add a VAT line on your invoice and charge them an additional 20% of the price you’re invoicing, if your product or service is 20% VAT rated. So if your goods are being invoiced at £200, you add 20%, which is £40, to the invoice, and your customer owes £240. Sounds fantastic until you realise it’s not yours to keep! However there is a silver lining.
So, you pay VAT on invoices you receive from your suppliers (if they themselves are VAT registered and have charged you VAT) and receive VAT from your customers (whether they are registered or not). Stay with me. You then do a simple sum to calculate the difference – VAT received minus VAT paid. If you’ve received more VAT than you’ve paid out then you owe HMRC the difference. But (and here’s the good part) if you’ve paid out more than you’ve received then HMRC owes you the difference – and they will pay it to you as regular as clockwork, provided you are registered and you claim.
There is a turnover threshold above which you have to register for VAT – it’s approaching £100K turnover each year. But you can (and should) register for VAT even when you’re not generating any income. Your suppliers (if they are registered) will charge you whether you are registered or not, so why not get yourself registered as quickly as possible and then claim back all the VAT you pay on your supplies. In my experience, so long as you can honestly say to HMRC that you are developing a business that will generate VAT income in the future, they will allow you to register and claim back what you spend before you’re raising business invoices. And that can save you a lot of money and improve your cash flow.
That should keep the moaners happy.
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