Why being VAT registered is critical to your business

Are your finance and accounting processes digitised?

September 8, 2020

Tony Bolger shares his viewpoints on the IR35 changes

December 8, 2020

There are many people who attach negative connotations to the phrase ‘VAT registration’. For some, the phrase is synonymous with ‘losing money’. However, this is a short-sighted argument and, when approached correctly, there are actually many benefits to registering your business for VAT.

A VAT survey showed that only 47% of UK respondents knew that the national standard rate for VAT is 20% in the UK. This indicates that there is perhaps a lack of education surrounding the VAT legislation in the UK.

This article will take a closer look into the benefits of VAT, with particular emphasis on how VAT works in the recruitment industry.

Highlights

What is VAT and the two different ways of calculating your VAT
The benefits of becoming VAT registered and why it is critical to your business
Steps and methodology behind filing and calculating VAT

What is VAT?

VAT stands for Value Added Tax. Currently, companies only have to register for VAT when their annual turnover exceeds the threshold (£85,000).

The government charges VAT against most goods and services, with a few exemptions. The standard rate for VAT is 20%, the reduced rate is 5%, and there is also zero rate 0%. Most businesses will fall under the standard rate, but you can learn more about eligibility for reduced rates here.

Input and output VAT

Input and output VAT describe which way the VAT money is flowing: either to you or away from you.

1. Input VAT

Input VAT is the money that you reclaim from HMRC from goods and services that you purchased. For recruitment agencies, this can include VAT paid on job boards, CRM software, and phone lines.

2. Output VAT

Output VAT is the money that you owe to HMRC from goods and services that you provided. In recruitment terms, this will be VAT charged on invoices for both temporary and permanent UK placements, as well as retainer fees. It’s important to note that VAT is not charged on international placements.

The different types of VAT accounting

In the UK, you need to choose from one of these two methods for calculating your VAT:

1. Cash accounting

This method only takes into account VAT on sales that have taken place, and have been paid for. You’ll only be required to pay output VAT once you’ve received payment from your client. Similarly, you’ll only be able to claim input VAT on invoices that have been settled.

2. Invoice accounting

Invoice accounting takes into account any invoices that have been received or sent, regardless of whether or not they’ve been paid. Once you send an invoice, you’ll be required to pay output VAT for it even if you haven’t yet received payment from your client. You’ll also be able to reclaim input VAT on services and goods that you’ve been invoiced for, but haven’t yet paid for.

How does it work?

Every quarter, VAT registered businesses need to complete their VAT returns to HMRC. Depending on the type of VAT accounting you’re using (cash or invoice accounting), you’ll need to state how much input VAT you’re claiming, and how much output VAT you owe. If you owe HMRC money, VAT payments are usually made to HMRC at the same time.

Why is it important to be VAT registered?

Although you’re only obliged to register for VAT when your annual turnover exceeds £85,000, there are approximately 1 million UK businesses that have voluntarily registered for VAT, despite their turnover falling short of the threshold.

1. To save money on business expenses

When you register for VAT, you’re able to claim back any VAT you paid on goods and services. This can be particularly useful for startup recruitment agencies who have a higher outlay during the early phases of their business. Although they’ll be required to pay VAT on any revenue received (which should have been charged to the client at the point of sale), they will be able to reclaim money on services purchased, which can lead to great savings.

2. To look more established than you are

If you’re not VAT registered, people know that your business is turning over less than £85,000. However, if you are VAT registered, there is no telling whether or not your annual turnover exceeds the threshold.

Therefore, becoming VAT registered can be a smart tactic if you’re wanting to present your business as established and successful. This can be particularly useful in establishing relationships with larger companies that only want to work with VAT registered businesses, or for attracting the attention of investors.

3. To receive a VAT registration number

Once you’re VAT registered, you’ll be assigned a VAT registration number. You can display this on your company documents, in email and letter footers, contributing to your business’ overall image and level of professionalism.

4. To reclaim VAT on goods purchased up to 4 years ago

Once you register for VAT, you can actually claim input VAT for goods and services you purchased in the 4 years leading up to your registration, so long as you’re still using them at the time of reclaiming.

How to file and calculate your VAT

The downside to being VAT registered is that it’s a heavy admin operation and requires excellent attention to detail. It can require the assistance of a bookkeeper or accountant. However, having all of your numbers in order is good business practice and something that you’ll be grateful for later down the line.

Here’s how to file and calculate your VAT:

Registering for VAT is straight forward. In most cases, you can register online, and will need to provide details of your business’ turnover and activity.
Assuming you operate at the standard rate, you’ll need to start adding 20% to your sales invoices for goods and services provided.
When logging your expenses and invoices, consult with your accountant or bookkeeper to agree upon the best process. Usually, a simple spreadsheet will suffice.
When it comes to doing your monthly accounts, it’s good practise to place any output VAT into a separate account. This will prevent you from accidentally spending it.
VAT is filed quarterly online to HMRC. If you’re late filing your VAT return, you may incur a surcharge or penalty.

Conclusion

The common misconception is that you should only register for VAT when your annual turnover exceeds £85,000, but small companies and even startups have proven voluntary VAT registration can be a smart business move. Perhaps VAT is not the dreaded beast it’s made out to be.

When implemented correctly, being VAT registered can bring about cost savings, increased profits, and an improved business image that results in new deals and investments.

Want to learn more about cost-saving in recruitment?

Get in touch today and discover how our outsourced team can help your business to thrive every step of the way.

Subscribe to our updates to receive the latest accountancy insights.