If you are self employed the chances are good that you will have had to think about VAT at some point. Some businesses become registered for VAT the moment they open their doors, whereas others are small enough not to have to worry about it for a while.
But whatever size your business is, or however long it has been trading for, you need to be aware of how VAT might affect you. For example, you need to keep an eye on your turnover to make sure that you register at the right point. You need to be bringing in £67,000 or more before you have to register; you can still do it before then if you want to, but it is purely voluntary up until that point.
One aspect some people do not realise as far as value added tax is concerned is that the threshold applies to the amount of money coming in – not the amount of money you are actually earning. So for example, your business could turn over £50,000 a year, but your profit (that is, the amount that you would pay income tax on) is just half of that.
In this case you would be able to bring in another £17,000 before you had to register for VAT. It wouldn’t matter how much or little of that money was actually profit.
So it obviously pays to keep an eye on those figures. And when you do get close to the threshold, start thinking about whether or not you are ready to actually handle the change.
It is highly advisable to seek the help of a qualified and experienced accountant in this case. You will probably have one already, but make sure you let them know when you are nearing the VAT threshold, as they may be able to make the transition much easier for you. They will certainly have a better understanding of it than you are likely to!
Another great source of information is the HM Revenue and Customs website. You can go to the relevant section, which has plenty of links to give you more information on various aspects of VAT and how it works.
Pay particular attention to the tools section. It might look small but it is packed with plenty of information on how to understand how it affects your own specific business. As with most tax situations it is not a case of one size fits all – and the more you learn up front the easier you will find it to make the transition.
The other basic difference you need to think about with regards to VAT is that unlike your income tax, it isn’t paid once a year. Instead it is paid every three months, so you need to make sure you are well up to date with all your records in order to file your return in plenty of time on each occasion.
As with anything, once you are registered and aware of what needs to be done and when, you will find VAT easier to handle. But don’t be afraid to ask your accountant for advice whenever you need it!