Here we are swimming along nicely in your company’s financial year. Things are going well. You’re growing at a nice pace, attracting more customers and seeing some marketing and sales wins. At your month end, you notice your YTD figures are coming close to the VAT threshold. Suddenly, your world turns dark and the knot in the pit of your stomach becomes much tighter and more noticeable. Ewwwwww VAT you think. What does that even mean? How on earth am I going to make sure that this is done properly and why do I even care?
Well, let me tell you it’s not as bad as you might think. As a right brained individual that has never, and will never, call accounting my strong suit, the thought of all this VAT malarkey was pretty terrifying.
So, as I’ve been through it and lived to tell the tale, I thought it best to share some tips on how to get through this next phase of your business.
If you’re looking like you might turn over in excess of £85,000 in your financial year then it’s a fact of life that you’re going to need to get yourself VAT registered. I didn’t wait until I was right up against the threshold to start thinking about it. You see, anything to do with accounting and HMRC scares the pants off me so I started to get my proverbial ducks in a row much sooner than I needed them. Looking at my sales projections, I knew roughly when I would have to register, so it’s a good idea to do a bit of forecasting.
And while I’ve managed to get the process kick-started without too much fuss, it does all seem like money for nothing. But you really need to acknowledge that this is a good thing and push your business through this tricky period where cash flow may become an issue. But first things first, let’s talk about registration.
Passing on the cost
If you’re selling direct to customer, VAT registration can have a real impact on your bottom line. Essentially, you’re adding 20% on to the cost for the customer or having to absorb an extra 20% in the current price to pay HMRC. Before you’re due to get registered, it’s important to understand what that looks like for your business.
For me, it was important to start growing the wholesale side of my business where VAT basically has a cancelling out effect. Growing this side meant that I was able to only raise my direct to customer costs slightly and absorb the remainder so that the VAT bill at the end of the quarter wasn’t enough to wipe me out completely.
Get organised, like I’m talking seriously organised
Your first VAT return will be the most complicated, but it’s also an opportunity to claim back all the VAT you’ve been paying to other businesses. Before you’re registered, you absorbed that additional 20% that almost every business sticks on the end of an invoice. For the six months prior to registering, you can claim all of that back in your first return. Plus any assets that are still in the business that have been purchased up to four years prior.
So if you have a bag of receipts sitting in the corner of your office that you’re perpetually promising to sort out tomorrow – stop your dilly-dallying and get them sorted: today. If you don’t you’re likely to miss something that you could have claimed back.
There’s nothing like professional advice
As a small business, it’s sometimes not the easiest decision to hire a professional to deal with things like accounting. After all, there’s got to be a million blog articles and YouTube tutorials on this and they’re all free. But let me tell you, the time it would take you to understand the process and all the ins and outs would be huge. And then you’ll never know if you’ve done it correctly until the tax man comes knocking at the door.
That’s a knock that I never want to answer, so my biggest and most important piece of advice is to talk to a professional about this process. Even if it’s not an ongoing monthly retainer, just getting someone to make sure you’re heading in the right direction will make it easier to sleep at night.
When my business registered for VAT, I thought it would be weeks of work on my behalf – even though I use accountants every month for all my bookkeeping/payroll and accounts. And you know what? It so wasn’t anything like that.