What is V.A.T.?

V.A.T., or Value Added Tax, is the amount of sales tax you are required to collect from your customers if you are a V.A.T. registered company.

Your V.A.T. number should be clearly shown on all of your sales invoices, and the extra sum for this tax clearly identified.

There are different schemes available, and different rules and regulations based on your area of trade. Sorry, but you, or someone working for you, will need to read up and fully understand how your company is affected. A quick Google will bring up the current government 'gateway' site.

As a rule of thumb, most of the companies I've worked with submit quarterly returns and use the simpler 'accrual' method of accounting.

Should I sign up?

You may not have a choice! Once your sales turnover hits a particular level (£67,000 as at July ’09, but do check for current rate), registration is compulsory.

If your turnover is below this level, and likely to remain so, then you have the choice. As a musician, most of my clients are not registered themselves -individuals having parties, getting married or running fund-raising events. Adding a chunk of tax on top of my bill to them benefits neither of us, so neither entertainment company is registered.

Working in accounts and admin however, most of my clients are themselves registered, so will merely claim that part of the invoice back. Also, it is possible for me to in turn recover the V.A.T. on equipment, printing, stationery and other supplies.

Although there are more hassles involved in collecting this tax for the government, it does mean that you have fixed times to get your accounts fully in order by (usually each quarter), rather than struggling with everything at the year end.

Consider what you sell, who you sell to and what materials you buy. A painter and decorator I worked with used huge amounts of materials – it would have been very difficult indeed to try and compete against rivals if they were registered, and he was not.

One word of caution though. If you think that the Inland Revenue staff who deal with income tax are not exactly a bundle of laughs, they’re a bunch of pussycats compared to the Revenue and Customs lot. I think that the clue is in the name, and their history dealing with smugglers and other colourful characters. I suspect they miss the chance to now to run around brandishing cutlasses. Don’t mess with them.

What are common problems with V.A.T.?

Do make sure that your records are accurate, and that you reclaim everything you are entitled to. The rules can be quite complex, and do change. Use someone experienced to look after your books, or take the time to learn this yourself. Please don’t just thrust everything on an unwilling partner and expect them to sort it all out for you, it will only end in tears and the withdrawal of nookie privileges.

Make sure that you always look at your turnover based on the net sum, not the gross (including the V.A.T.). It is not your money, and never was, don't spend it! In fact, it is not a bad idea to calculate the sum due each month and then move it to a separate savings account so that your current account does not start looking temptingly plump and juicy...

Accountants will sometimes recommend that you opt for the ‘cash’, rather than ‘accrual’ scheme. This can make sense if it takes a while for you to be paid by your customers, as you are only liable for the V.A.T. once payment comes (rather than when the sales invoice is issued). But do please be aware that it is usually a harder system to operate, and it will not be as easy to keep track of all outstanding sums due. I suggest you do some ‘back of an envelope math’ to see what the implications would be for each scheme, then decide if the extra hassle is worth it.

When you buy from other EU countries, some sellers operate the system where, so long as you can provide them with a valid UK V.A.T. registration number in your company name, they will invoice you net, without the tax. If they don’t, you’ll need to pay the tax and recover from the country they are based in. This is usually a classic example of when it is best to use a specialist third party. They’ll charge you a commission to handle all the forms and hassle, leaving you free to concentrate on earning the money!