VAT – Can we reduce our bill?
(especially for Small Businesses)
The VAT theory
VAT is a great way of raising funds for the economy and in theory should not affect business owners. Each business passes the VAT burden onto the next supplier and eventually the consumer pays the VAT and not the business. So in theory the business should not worry, as all things been equal, it should have no VAT to pay each quarter.
This is not a problem for large businesses because usually their customers are themselves VAT registered and so they are not worried about been charged or charging VAT.
The story for small businesses
For the smaller business, however who are usually dealing with the general public (the final consumer) VAT really just pushes his or her price up. So the next time you have lunch in a café and you get your bill for say £11.75, remember that you’re really paying £1.75 (17.5% VAT) to the VAT man and £10 to the café owner. I often say to clients of mine (as a joke!) that they might as well have a separate till for the VAT man! Of course I’ve simplified matters in this example – a restaurant might be able to claim some costs back and reduce their VAT bill but as most food is zero rated its unlikely there’ll be much to claim back.
Small business need help with VAT
In France recently their government has been much more proactive. They’ve reduced their VAT rate, in restaurants anyway, from 19.6% to 5% - now that’s what I call a proper VAT decrease! Our temporary reduction from 17.5% to 15% was more trouble than it was worth!
Actually the UK threshold of £70,000 is thankfully one of the highest in the EU but some countries have staggered thresholds and lower VAT rates which would be more of an incentive to increase your sales! A lot of small businesses could then trade without having to worry about slipping into the VAT burden and losing their margins.
Other than lobby our own MLA’s, MP’s and government what can we do in the short term to reduce our VAT bill.
Possible ways to save VAT
1. Diversify into other areas
For any business this means trading in something that is zero rated for VAT purposes. Good examples of zero rated supplies are children’s clothes, books and newspapers. If you’re a plumber you may be able to charge VAT at the reduced rate of 5 per cent when you supply and install certain energy-saving materials.
For a restaurant or café you could start dealing in take-away cold food. There is a subtle difference here between what is considered hot and cold food. For instance if you sell scones that you warm simply because they happen to be freshly baked and are not intended to be eaten hot then this could be zero rated. It is interesting to note however that the VAT and Duties Tribunal has recently found in favour of HMRC in an appeal by Domino’s Pizza Group Ltd, who had argued that their supplies of hot takeaway and delivered pizzas should be zero-rated because their purpose in heating the food is to supply a freshly baked product, rather than to enable their customers to consume the product hot. Of course we all like our pizzas hot and in this case most people might even agree with the courts decision!
2. Use the flat rate (small business) VAT scheme
This might not only save you in money terms but it could also save you hours of admin work (and time is money!) The way the Flat Rate scheme works is that HMRC give you a flat rate VAT percentage that you multiply by your gross turnover every quarter. The flat rate percentage is different for every particular type of business. The one stipulation is that your annual turnover has to be £150,000 (excluding VAT) or less.
3. Try to get corporate or business customers
These customers (if they themselves are VAT registered) don’t mind that you are charging them VAT because they can claim it all back. If all or most of your customers are VAT registered it might even be worthwhile to voluntary register - you can do this even if your turnover is below £70,000.
4. Don't register too early
Finally if you do have to register for VAT (and you’re dealing generally with the public) it’s usually wise not to register too early. In most cases a trader only becomes liable to register for VAT if the value of his cumulative taxable supplies exceeds £70,000. You can however still claim back for up to six months from date of registration for VAT you’ve paid on services and for three years for stock or equipment you’ve purchased. Your first VAT return will then often result in a payment from HMRC to you.
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