Managing bookkeeping and accounting can create a lot of stress for creative business owners who often don’t want to be worried about the details of their business finances – they’d much rather be making music, creating stunning artworks or photographing beautiful landscapes. But finances are a fact of life that we can’t get away from in business and VAT is no exception. This short blog looks at VAT registration; the when, the why and the how and the steps to take to make it a stress-free process.
Why and when VAT Registration matters
VAT (Value Added Tax) is a tax that’s added to the sale price of goods and services. Not all goods and services must have VAT added as some items are exempt from the tax but many companies operating in the UK provide taxable goods and services.
VAT registration is compulsory for businesses (whether limited companies, partnerships or sole traders) where vatable revenue exceeds £85K in a 12-month rolling period.
This phrase ’12-month rolling period’ can trip people up. It means that you need to be constantly assessing whether your business meets the threshold for VAT registration. At the end of each month, look back 12 months and if your total vatable turnover exceeds £85,000, you must register for VAT. It pays to keep an eye on this from the point where your monthly vatable turnover starts to hit around £7k consistently.
How to calculate vatable turnover
Vatable turnover excludes any exempt or out-of-scope supplies made by your business.
VAT-exempt income sources
- Financial services
- Income from betting, gaming and lotteries
- Rental income
Income outside the scope of VAT
- Disbursements/expenses incurred on behalf of a client
- Goods outside the scope of VAT because of the place of supply rules,
- Services made to a business customer in the EU or any customers outside the EU
- One-off sales of capital assets
- Grants or any income from employment
Benefits/considerations of voluntary VAT Registration for creative businesses
If your vatable supplies are less than £85,000 in a rolling 12-month period, you aren’t obliged to register for VAT but it is an option.
You might be thinking that voluntary VAT registration sounds like a huge chore, creating lots of additional admin that’s just unnecessary. To an extent, that’s true. However, there are a couple of benefits of being VAT registered.
- Being VAT registered could suggest that your business is bigger and more professional than a competitor who isn’t VAT registered. This could help you win potential clients.
- Becoming VAT registered means you can reclaim VAT on purchases which you cannot do if you aren’t registered.
On the other hand, being VAT registered can often bring more HMRC scrutiny to your business. It’s not uncommon for the Inland Revenue to issue a VAT enquiry to check into your record keeping.
Is Your Creative Business VAT-Ready?
Aside from your business turnover approaching the VAT registration threshold, there are other things to consider for VAT readiness. Managing your VAT return can be an admin-heavy activity in your business unless you keep accurate and timely financial records.
One of the easiest ways to manage the VAT return is to use cloud accounting software such as Xero or QuickBooks to streamline your bookkeeping processes. You can use receipt capture software to automatically upload your payments into your bookkeeping software and allocate the right amount to VAT. Additionally, these tools enable you to quickly prepare and submit your quarterly VAT return, saving you hours of detailed finance admin work that used to be done on spreadsheets.
Identifying VAT-applicable goods and services in the creative industry
In many creative industries, it’s necessary to buy expensive equipment to perform your services. VAT is charged on items such as cameras, tripods, musical instruments, costumes, lighting and so on. These are all valid deductions for Corporation Tax and VAT can be reclaimed from HMRC but you need to be VAT registered to reclaim the tax. This means you will also be required to charge VAT to your customers on the vatable supplies you make to them.
Step-by-step guide to VAT Registration
Most businesses can register for VAT online if they have a Government Gateway account. Alternatively, you can appoint an agent (your accountant) to manage your VAT returns for you.
To register you’ll need your UTR (Unique Taxpayer Reference) number or your NI number. You’ll also need your business bank account details. You must register within 30 days of the date when you expect your vatable turnover to exceed £85K for the past 12 months.
At the time of writing, it is sometimes taking more than 3 months for HMRC to issue new VAT registration numbers.
It is still possible to register for VAT by post. You’ll need to use the VAT1 form which you can download from the gov.uk website.
Understanding the different VAT Rates
There are three different VAT rates for vatable supplies:
- Standard rate, currently charged at 20% (correct as at Nov 2023)
- Reduced rate, currently charged at 5%
- Zero rate, currently charged at 0%.
In addition, there are VAT-exempt supplies which do not attract VAT at all. There is often confusion between zero-rated and exempt supplies because the financial effect on the overall cost is the same for the buyer. However, a supplier of zero-rated goods/services can reclaim VAT paid on the costs of making that supply whereas they could not reclaim VAT on the costs of making VAT-exempt supplies.
Examples of zero-rated goods and services include most food items and children’s clothing. Examples of exempt supplies include insurance, education, and health services. For most creative businesses, they are likely to make standard-rated supplies so will need to add 20% to their invoices and can reclaim VAT on any business purchases made. More information is available here about different VAT rates.
Understanding the Flat Rate Scheme
The Flat Rate Scheme allows you to charge your customers at the standard rate of 20% and pay a fixed rate of VAT to HMRC. You then keep the difference between what you charge your customers and what you pay over to HMRC.
If you opt for this scheme, you cannot reclaim VAT on your purchase, except for certain capital assets over £2,000. To join the Flat Rate Scheme, your turnover must be under £150,000 (excluding VAT) per annum.
Alternatively, you can use the Standard VAT Accounting Scheme to account for your input and output VAT or if your turnover is under £1.35m, you can opt for VAT Cash Accounting Scheme or the VAT Accrual Accounting Scheme. It’s important to discuss the options with your accountant to get the best scheme for your circumstances. If you aren’t sure, please give us a call about it.
Staying VAT compliant
Once you’ve registered for VAT, you’ll need to be meticulous with your record keeping. Ensure you meet all the HMRC requirements for VAT invoices.
Filing your VAT return and making any payment of VAT due on time is vital if you want to avoid late penalties and the increased chance of a VAT enquiry (investigation).
Getting help with your VAT registration
If you aren’t sure whether you must register for VAT and when or need help to decide which VAT accounting scheme to use, Green & Peter is here to help. Our customers rate us as one of the best accountants for creatives in North London. Book a call with us today to discuss your circumstances so you can avoid any nasty surprises from the VAT man. Call us on 0208 446 8100 or email email@example.com