Starting a business can be complicated. Not only do you need to provide your services or products to your clients, but you also suddenly have to deal with all the other sides of running a business such as the finances. VAT in particular seems to confuse a lot of people, so let’s bust some VAT myths.
Not every business needs to charge VAT on their goods or services. I often speak with people who think that because they’re running a business they need to charge their customers VAT. Only VAT registered business can charge it, and if your total sales are less than £85,000 then you don’t have to register. This means that you mustn’t charge your clients VAT, and you also can’t reclaim any VAT that you pay on your expenses. Even if your turnover means that you don’t have to register, you can still choose to voluntarily register with HMRC and are then required to collect VAT from your clients and pay this over to HMRC.
While that would be nice, VAT is a tax on most goods and services and is paid by anyone buying those items. It’s the seller’s status that determines whether you’re charged it, not yours. This leads nicely on to…
I’ve heard some people say that they only need to charge VAT if their client is also VAT registered, but this isn’t true. If your business is VAT registered then you must charge VAT on any goods and services that fall within the scope of the scheme.
Another misconception is that charities don’t have to pay VAT on anything they buy. It’s true that some charities don’t pay VAT on certain goods or services, but you shouldn’t assume that you don’t charge charities VAT. It’s your responsibility to check that the charity is eligible for a reduced or zero rate, so if you deal with charities you should familiarise yourself with the criteria.
Although VAT is a relatively simple tax (honest!), it’s definitely not without its complexities and so you should always seek advice if you’re not sure. For now, I’ll leave you with one of my favourite VAT quirks: a gingerbread person with chocolate eyes and trousers incurs VAT at 20%, yet take off the trousers and they’re zero (as well as x-!) rated.