Categorized | matt's blog

VAT and the small business – should you register?

Value added tax is 40 years old this year and it deserves a birthday celebration. VAT wasn’t born as such, he was simply a rebranded form of something called purchase tax that we had in the UK previously.

Not many people are aware, but VAT (previously purchase tax) was only supposed to be a temporary measure while the war was on? Back in 1940, we were a bit short of cash, so the chancellor had the idea of taxing the people with the least amount of money. He couldn’t very well raise income tax for the poor, so instead he decided to add a sales tax onto everything they purchased instead. In fact, in his speech to Parliament, Sir Kingsley Wood made sure the act would not be retrospective as that would affect poor families that had lost their belongings in the Blitz. But he seemed more than happy to tax items that would be destroyed in the future.

After the war, other governments realised what a brilliant wheeze this was and all began to add in purchase taxes of their own, albeit with different names. This brings us up to 1973 and the UK joins the EEC. Under the joining regulations, we had to fall in line with everyone else and rename our purchase tax. And by some strange coincidence – we had to increase it as well. Purchase tax was 10% at most and Vat was set at 25% for some goods by a man with huge eyebrows about a year later.

Nowadays, any business with an annual turnover of more than £77,000 has to register for VAT. More importantly, the question a business must ask is shall I avoid taking work on that will mean I go over the threshold? What business needs to ask itself is who do I usually sell to? If your business mainly sells its goods/services to other business that is VAT registered, then going over the threshold and becoming VAT registered is the best path.

However, if you mainly sell your goods/services to members of the public, be careful. They can’t claim your VAT back from HMRC and so you run the risk of being 20% more expensive than your competitors. More importantly, once you are VAT registered – you have to charge VAT on all of your goods/services (exceptions apply), not only the ones that go over a £77,000 annual limit. Taking all of this into account, if your business is hovering around the £77,000 per annum turnover limit, don’t do any more work. Simply sit at home and do nothing, safe in the knowledge that you won’t be 20% more expensive than your competitors for another year.

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