Ep07 - VAT Made Simple - When to Register and How to Manage It

VAT can feel complicated, but it doesn’t have to be. In this episode, Nicola explains what VAT really is, when you need to register, and how it affects your pricing, cash flow, and customers.

You’ll learn about compulsory and voluntary registration, how the VAT threshold works, and what to consider before making the jump. Nicola also shares practical advice on submitting returns, managing VAT within your bookkeeping software, and avoiding the common mistakes that trip up small businesses.

Whether you’re close to the threshold or already VAT registered, this episode will help you feel more confident and in control of your VAT responsibilities.

What You’ll Learn:

• When VAT registration is required and when it might be beneficial.
• The pros and cons of voluntary registration.
• How to manage VAT effectively and avoid common pitfalls.

Resources & Links:

I’ve written a book that expands on the topics in this podcast and comes with a companion guide. Learn more at www.thenumbersquarter.co.uk/book.

About the Podcast:

The Balanced Business – The Director’s Handbook is a 12‑part podcast series hosted by Bedford‑based Chartered Accountant Nicola Hageman. Designed for UK small business owners and company directors, the podcast explains how to run a Limited company with more clarity, confidence, and control. Each episode covers a practical topic – from choosing your business structure and staying compliant with HMRC to budgeting, VAT, systems, and delegating. The series is based on Nicola’s book and companion guide, available at www.thenumbersquarter.co.uk/book.

About Nicola and The Numbers Quarter:

Nicola Hageman is the founder of The Numbers Quarter, a friendly and approachable accountancy practice based in Bedford. She specialises in helping owner‑managed businesses grow their profits, plan for the future, and reduce stress. Nicola is known for her plain‑speaking advice and passion for aligning personal and business goals.

Connect with Nicola:

• Instagram – www.instagram.com/nicola_hageman
• LinkedIn – www.linkedin.com/in/nicolahageman
• Website – www.thenumbersquarter.co.uk

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Transcript

0:13

Hi, and welcome back to the Balanced Business Podcast. I'm Nicola Haman from The Numbers Quarter, and you are listening to episode seven of the Director's Handbook, where we talk through real life practical things that every limited company director should know without all the jargon or overwhelm. And today we are diving into a topic that's part tax, part cash flow, and part confusion, VAT or value added tax. Now, I know that VAT is not the most exciting subject. I'm not expecting you to pop the champagne in celebration. But if you are running a growing business or even just planning ahead VAT is one of those things that you really need to understand because when you don't understand it, it can sneak up on you. Cause cash flow stress, or worse, it can land you in hot water with HMRC, but when you do understand it, it's just another part of running your business like a pro. So today we are going to walk through the essentials when you have to register, when you might choose to register, what that actually is and how it affects your pricing, your paperwork, and your planning. So let's make this one feel clear and calm, not complicated and confusing. Okay. What is VAT? Let's strip it back. VAT or value added tax is a tax on the sale of goods and services. you're probably already familiar with it. As a consumer, it's usually included in the prices that you see in shops or online as a business, when you're VAT registered, you are acting as a kind of tax collector. For HMRC, you charge VAT on your sales and you pay VAT on your business purchases. Once a quarter, you file a return that tells HMRC the difference between the VAT you've collected and the VAT you've paid, and either pay the difference or you get a refund. You are not usually paying VAT out of your own pocket. You are just handling it on behalf of the government, but it can still impact your cash flow, your prices, and how people perceive you as a business. So it's worth understanding how it works. So when do you have to register? Let's talk about thresholds. At the time I'm recording this, the VAT threshold is 90,000 pounds in taxable turnover in a rolling 12 month period. This changed from 85,000 in April, 2024. So if you've seen older guidance, that might be why the numbers don't quite match. Now here's the key point. It's not based on your calendar year or your tax year. It's a rolling 12 months, so you need to keep an eye on your turnover month by month. If you go over the threshold, even if you expect to, in the next 30 days, you are legally required to register. And if you don't, you can face penalties, interest, and possibly a VAT bill backdated to when you should have registered. So if your business is growing and you're getting close to that threshold, this is something that you absolutely need to monitor. So should you register voluntarily? Now, this is the interesting bit. You don't have to wait until you hit the threshold. You can actually register voluntarily. And for some businesses it actually makes sense. So why would someone choose to register early? Well, let's just say that most of your clients are VAT registered themselves. This means that they can reclaim the fact that you charge, so it doesn't really affect them, but it does mean that you can start reclaiming VAT on your expenses, which might actually help to reduce your overall costs. It can also make your business look more established. Some clients, especially in the corporate world, prefer to work with VAT registered suppliers. It adds a bit of credibility, but on the flip side, if your clients are individuals or small businesses who aren't VAT registered, they'll feel the increase in your pricing because they can't reclaim that VAT. So you need to think carefully about how it affects your pricing and your audience. So how does VAT affect your pricing? Let's talk about this properly, because this is where a lot of people get caught out. Once your VAT registered, you need to decide, do you absorb the VAT or do you add it on top? So let's say that you charge a thousand pounds for a service if you stay at 1000 pounds and include VAT. Within that, you are really only going to be keeping 833 pounds and 33 pence because 166 pounds and 67 vents, that's 20% goes to HMRC. But if you add VAT on top, your client now pays 1,200 pounds. You still keep the full 1000, but the extra 200 pounds goes to HMRC. But you are staying as you were. So it sounds simple, but here's the catch. Will your clients be okay with the price going up by 20%? As I said earlier, if they're that registered themselves, they probably won't care'cause they can claim it all back. But if they're not, that extra 20% might make a big difference. And this is why pricing and V 80 go hand in hand. You'll need to know who you are selling to and what the market will bear. You might decide to do a hybrid of the two. Maybe instead of charging 1,200 pounds in total, you might charge 1,100. This means that you make slightly less money per, item or per service, but your client doesn't have to pay the full that amount. It does mean because you're VAT registered and you can reclaim your expenses. It might be that the cost of delivering that service has reduced and therefore your overall profit has actually remained the same. So it's very, very important to look at the whole picture, do some calculations and talk to somebody if you want to go through this in detail. So what do you need to do? This is the admin bit. If you register for VAT, there are a few practical changes that you need to be ready for. So invoicing, you need to start issuing VAT compliant invoices. This means showing your VAT number, the rate of VAT applied, the VAT amount, and the total including VAT. If you're using proper bookkeeping or invoicing software, this is usually built in. But if you're doing it manually, you are going to have to make sure that your invoices meet the legal requirements, bookkeeping. So you need to track VAT on every transaction, sales and purchases, and make sure that you're recording the VAT element correctly. This can be fiddly, especially if you're using different VAT rates like standard reduced or zero rated. Good bookkeeping software like Xero or QuickBooks makes a massive difference here. So and so does working with a bookkeeper or an accountant who understands how your business operates. Please, please though do not just blindly believe what, uh, Xero or QuickBooks are telling you. You need to understand what your invoice is and what your VAT is showing you. And then the VAT returns every quarter. You need to file A VAT return with HMRC. This shows how much VAT you've charged and how much you're reclaiming. The difference gets paid. HMRC or refunded if you're in a repayment position, returns must be submitted under making tax digital, so you need to use software that is MTD compliant. Name more spreadsheets or logging into the HMRC portal manually. It all has to go through your digital records. Now there are quite a few different VAT schemes available, and depending on your size and the nature of your business, some might work better than others. So you have the standard VAT accounting, This is the default. You charge that on sales, you reclaim that on purchases, and you file quarterly returns. You've then got the flat rate scheme, and this does. And this is designed for small businesses with turnovers under 150,000 pounds. You charge V 80 at the normal rate, but you pay H-M-R-C-A flat percentage of your turnover. Usually this is lower than the 20% works out to be. You can't reclaim that on any purchases except for certain capital items, but the admin on this is much easier and the rates can work in your favor if you don't have huge amounts of expenses. You also have cash accounting for VAT. So under this scheme, you only pay VAT when your client pays you, and you only reclaim VAT when you've paid your suppliers. So this is great for managing cash flow, especially if you deal with slow payers. All these schemes have pros and cons, and they're not right for everyone. These schemes have pros and cons, and they're not right for everyone. It's worth talking to your accountant before you choose one, and then we can help you run the numbers to see which is best for you. So what happens if you don't register on time? I'm gonna quickly touch on this because it is something that I've seen a few times. So if you go over the threshold and you don't register within 30 days, HMRC can backdate your registration and expect VAT on everything that you've sold since the day that you went over. So if you've invoiced clients without charging VAT, you might still owe it to HMRC, even if you can't go back and rein invoice. Which is hard. This is why it's so important to track your turnover monthly, especially if you're creeping close to the threshold. Okay, so my final thoughts, let's recap. VAT might feel like a bit of a pain, and yes, it does add some admin, but is also a sign that your business is growing. You are moving to a different league. The key thing is don't ignore it. Don't let it sneak up on you, and don't let it scare you either. If you're approaching the threshold, get some advice early. If you're not sure whether to register voluntarily, talk it through with someone who knows your numbers and your market, and if you are registered, make sure that you've got the right systems and support to handle it smoothly. VAT is just part of the game, and with the right approach, it doesn't have to be a headache. Thank you so much for joining me on this episode of The Balanced Business Podcast.. I hope that VAT feels a bit less intimidating now and a bit more manageable. In the next episode, we are gonna be shifting gears slightly and looking at how to understand your accounts without needing to become an accountant. We'll talk about profit versus cash, what your reports are telling you, and how to use your numbers to make better decisions. I am Nicola Haman from the Numbers Quarter, and I'll see you next time.