What You Thought About VAT Might Be All Wrong

Whether your business is approaching the VAT threshold or you've been registered for a while, VAT is a super confusing tax and there are lots of myths flying around.

Let us set the record straight!

“I pay VAT out of my business’s own pocket”

This one is such a common misconception.

You are simply charging and collecting VAT from your client or customer on HMRC’s behalf. You’re a tax collector basically! VAT does not generally affect your company’s profits.

“It’s all bad news when I have to register for VAT”

Reaching the £90,000 turnover milestone in your business is something to be celebrated in itself.

Yes, there will be additional reporting to be done. This may require levelling up your financial systems and processes so you have accurate and timely records. You’ll also need to issue valid VAT invoices to your customers.

On the plus side, you can usually claim back the VAT on your business purchases.

“My business can recover VAT on everything”

Yes, one of the perks of being VAT registered is that you get to reclaim VAT on your purchases. But you can’t claim it back on everything.

You can’t claim for anything that is fully private use. If it is both business and personal, VAT must be apportioned.

You can’t also can’t claim for business entertainment or purchases without a valid VAT invoice.

“I must pay VAT before my customer pays me”

If you are on the Standard VAT scheme, then this might happen. Especially if you have slow payers.

But you can claim bad debt relief if your customer hasn’t paid you after 6 months.

If this regularly causes cash flow issues, you can opt for the cash accounting scheme. This means you only pay VAT when your customer pays you.

“Charging VAT will kill my business”

This really depends on your market.

If you operate Business to Business (B2B) with larger clients they are likely to be VAT registered themselves. This means they will claim back the VAT on your invoice anyway.

If you are Business to Consumer (B2C), your end customer as a private individual could be more price sensitive to additional VAT. This can cause more of a dilemma on higher-ticket items or if many of your competitors aren’t VAT registered.

In this case, you may need to consider market positioning and your pricing strategy more carefully. Remember that everyday consumers are used to paying VAT on goods and services. It’s important to be transparent about your pricing.

Some goods and services are exempt or zero rated for VAT to be sure to seek advice on the right VAT rate to charge!

VAT is one of the unavoidable parts financial ecosystem as your business flourishes. It comes with responsibilities but there are positives such as being able to reclaim VAT and creating a positive impression of legitimacy and trust.

At Beaver & Bee, we work with VAT-registered female founded businesses and and have helped newly VAT registered companies navigate this tricky tax.

Need help with VAT? Book a discovery call with us today and let us help make VAT work for your business in a savvy and stress-free way.