There are many myths and half-truths floating around in the world of small business regarding VAT and it is feared by many of the self-employed. Like it or not, VAT is part of the landscape of being in business and to run your business successfully, it is just another aspect of business to get to grips with. If you don’t, like other business taxes it can break you and your business and all end in financial disaster.
Before getting anywhere near the detail of VAT, it is necessary to understand how VAT works. VAT is not a cost to your business, although of course for many, it is difficult to understand the reason why. As a VAT registered business, all you are doing is acting as a PAID tax collector – you add VAT to your sales, hold onto the VAT for a short period and then pay over the VAT to HMRC. In return for your labours, you get paid for collecting the VAT, as you can recover VAT on your expenditure (although, as always in life, there are some exceptions).
Let’s look at an example. Let’s suppose you’ve just started in business. In your first VAT quarter you raise a sales invoice for £5,000 to which you add VAT of £1,000. Also in your first VAT quarter you buy a new computer for £1,000 including VAT. The amount you have to give to HMRC is not £1,000 because you are allowed to deduct £166.66, this being the VAT on the computer. So as you’ll see, you’re actually better off being VAT registered, not worse off.
The problem of thinking VAT is a cost is a problem for those who think that the VAT monies collected belongs to them, as opposed to HMRC. Understanding and accepting this is much harder for those with VAT inclusive prices such as retailers, because then the difference between the traders own money and the VAT money is blurred. For those of us where we quote VAT exclusive prices, such as the trades or professionals, it is much easier to get your head round because the VAT is added as an extra.
Speak to us about your business or your business plans. We deal with VAT every day and are experts at a practical level.
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