The Beginner’s Guide to VAT for Small Business Owners


The Beginner’s Guide to VAT for Small Business Owners

As a small business accountancy firm, we understand first-hand how challenging and complex it can be to keep your business in good financial shape. One area that can often cause confusion for SMEs is VAT, or Value Added Tax. We want to help you understand VAT and keep your business safe and secure.

What is VAT?

VAT is a tax on the value added to goods and services. VAT is added to a customer’s bill by a business, saved up and later paid directly to HMRC. Depending on what your business sells goods and services can be charged at the standard rate of 20%, a lower rate of 5% or be completely exempt.

Do I need to register for VAT?

You must register if:

  • your total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold)
  • you expect your turnover to go over £85,000 in the next 30 days
  • You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.

There is also one more VAT Scheme: Accrual Scheme. This is when VAT is calculated based on the invoice date, rather than when the invoice is paid/received.

You can register for VAT on the Gov.UK website.

How do I calculate VAT?

Calculating VAT is simple, multiply the net value of the sale by the rate of VAT. So, if you are selling a product for £100 at a 20% VAT rate, the total will come to £120 (£100 + 20% VAT). You can even use our handy VAT calculator.

Don’t forget that if you are VAT registered, you must include the VAT charged on your sales in your VAT return, and deduct the VAT you have paid on your purchases.

What are the VAT schemes available for small businesses?

There are several VAT schemes available for small businesses to simplify the process of calculating and paying VAT. These include:

Flat Rate Scheme – where businesses pay a fixed percentage of their turnover as VAT

Cash Accounting Scheme – where businesses only pay VAT on their sales when they have been paid by their customers

Annual Accounting Scheme – where businesses make advance payments towards their VAT bill based on their estimated annual turnover

It’s important to consider which VAT scheme is most suitable for your business and seek advice from a professional accountant.

In summary, VAT can be a complex area for small businesses to navigate. However, by understanding the basics and seeking professional advice, you can ensure your small business is compliant with VAT regulations and make the most of the benefits available to them. At Crouchers, we pride ourselves on providing personalised and affordable support to help small businesses thrive.

For a longer read and to find out the ins and outs of VAT check out our extensive VAT guiders.