Xero, a cloud-based accounting software provider, simplifies the process of VAT management for businesses by automating calculations and filing returns based on invoices and expenses. Businesses that temporarily exceed the VAT threshold of £90,000 may apply for a VAT registration exception, which allows them to avoid registering for VAT if certain conditions are met. To qualify, they must submit a request to HMRC, explaining their situation and providing supporting documentation.
However, even for businesses not crossing the threshold, there can be advantages to voluntary VAT registration. This allows companies to sell to VAT-registered customers who can reclaim VAT, potentially making them more competitive. Around 20% of VAT-registered businesses operate below the threshold, often benefiting from reclaiming VAT on initial startup costs.
Grant funding generally does not fall under VAT, but conditions apply if they are tied to specific supplies. Various VAT schemes also exist to ease cash flow for small businesses. The Flat Rate Scheme allows businesses with turnover under £150,000 to pay a fixed percentage of their turnover in VAT, while the VAT Cash Accounting Scheme necessitates payments when cash is received. The Annual Accounting Scheme allows for one VAT return annually, best for smaller businesses.
For tradesmen and other small business owners, avoiding the additional 20% VAT can be crucial for staying competitive. Strategies to maintain turnover below the threshold can include restructuring into multiple business entities, though this must be legitimately justified to avoid penalties from HMRC.
Why this story matters:
- Understanding VAT registration options can significantly impact a business’s financial health.
Key takeaway:
- Applying for a VAT registration exception and considering voluntary registration could provide competitive advantages.
Opposing viewpoint:
- Some argue that the administrative burden of VAT registration outweighs the potential benefits for small businesses.
