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Intro to VAT
VAT stands for Value Added Tax. VAT is calculated based on the product's value, and consumers are charged based on this value. Most goods & services are subject to the standard rate of 20%; however, some are subject to less, and some are exempt completely.
VAT applies to the value added to a product or material at each stage of its manufacture or distribution. Materials have a specific cost from the manufacturing stage. They are then sold for a profit, resulting in a different price at the consumption stage. VAT is charged on this difference in price between the two.
VAT is classed as a consumption tax, which is simply a tax on purchasing a good or service. Read more about consumption tax and what it includes, such as excise tax and retail sales tax.
"VAT finance relates to a product's value."
When Do I Start Paying VAT?
When small businesses are new, they are under no obligation to pay VAT. However, as it grows, it'll reach a threshold where it is expected to be submitting VAT returns. The law sets that threshold at £85,000 yearly turnover. Once you have reached this threshold, you must register and begin to pay your VAT bill; however, you only need to start paying VAT after earning that amount. Additionally, you will need to do so if you expect your business to reach an £85k turnover in the next 30-day period. VAT is typically paid one month and seven days after the period in which the tax is collected.
If you fill out a tax return but haven't registered for or paid your VAT, you could come under investigation, as paying VAT is not at your discretion. If you own a limited company, that limited company must be VAT registered; however, if you are a sole trader, you can be VAT registered yourself.
"Once your business hits the threshold, you must start paying your VAT bill."
- Must charge VAT on their products or services
- May reclaim any VAT they've paid on business-related goods or services
- Must include import VAT on their VAT return if they use it
If you own a VAT-registered business, you must report to HMRC the amount of VAT you've charged and the amount you've paid. You do this by filing a VAT return, typically due every quarter.
You can choose to appoint an agent to deal with HMRC for you if you find that you are too busy.
Even if you receive goods & services over money or haven't charged VAT to the customer, you still must account for the total amount of what you sell.
It is your legal obligation to cover your VAT bills. However, your business may not be ready in time, which could raise substantial penalties and legal complications. There are various choices for how to best help your business by funding your VAT. A VAT loan is a helpful solution for companies in this situation.
It would be best to keep an eye on the deadline to ensure you do not miss it, as this could incur a fine. You will be able to find this deadline on your VAT return or use this VAT payment deadline calculator.
"Keep an eye on the payment deadline so you aren't late paying your VAT bill."
Why Finance your VAT Bill?
If your business cannot make enough money to settle its VAT bill, or if you would rather keep the money within the company for other expenses - it is a good idea to finance the bill through a business loan. The lender pays the loan on your behalf, which saves you the trouble of messing around making online payments to HMRC.
If your company cannot finance its VAT bill alone, financing can be a tax-efficient route as you can offset your repayments against your taxable profits.
Obtaining a VAT loan (also known as VAT funding or VAT bill funding) can aid you in utilising your working capital for other business expenditures.
Love Finance only ever provides unsecured loans, meaning that your assets are protected and never at risk. Unsecured loans also have a quicker process time as there is no need to evaluate assets.
Your business does not have to be in dire straits to take out a VAT loan, nor does it mean that you are if you do. Many small businesses choose to finance their bill every quarter, as they know it is a sure cost they will have to pay, and they would rather outsource the funds than spend their own.
"Funding your VAT bill through a loan can save money in other areas of the business."
How Much Will My VAT Bill Cost?
The amount that reflects on the VAT bill depends on the tax you paid for your business purchases and the amount you charged customers for their purchases from your business. There is a balancing effect when you factor in both sides. For example, if you collect more tax from your clients than you paid on your purchases, you'll owe the HMRC the difference. Conversely, HMRC would owe you the difference if you paid more taxes on your investments than you collected. If you pay too much VAT, then HMRC should repay you within 30 days of receiving your VAT return.
If you haven't heard anything from HMRC within this time period, contact them as you may be eligible for compensation, also known as a repayment supplement. The repayment supplement will either be £50 or 5% of your repayment - whichever is the higher amount.
You won't be eligible to receive a repayment supplement if:
- HMRC receives your VAT Return after the payment deadline has passed
- HMRC is still waiting on earlier returns you have submitted
Typically, a VAT loan will be £1,000+, but the amount you borrow depends on your financial status.
There are different VAT rules for other trade sectors; for example, how much builders and charities account for and how much they pay and claim may differ.
"The amount on your VAT bill depends on how much tax you paid vs. charged."
What is Corporation Tax?
Corporation tax is imposed on the taxable income of a corporation. The tax is used to finance public expenditures and to encourage or discourage particular economic activities through subsidies and tax breaks. The tax rate varies depending on the type of business and the jurisdiction in which it is located. In most jurisdictions, the corporation tax rate is lower than the personal income tax rate. This allows businesses to retain more of their profits and reinvest them in their operations, which can lead to economic growth.
Benefits of VAT Finance
VAT finance can be beneficial for your business in a variety of different ways:1. You can avoid late payment penalties
If you pay your VAT bill late or fail to register once you meet the requirements, you could acquire a fine of up to 15% of your bill. Financing your VAT bill ensures that you meet the legal requirements of being VAT registered and will be able to avoid late payment penalties.
2. Protect your cash flow
It is always vital to protect your cash flow by keeping your profits within the business. Unexpected business costs could occur at any time. If you do not save some cash reserves aside to cover these, this could be dangerous for your business and cause it to go under. Protecting your cash flow allows you to pay staff and rent on time, purchase tools, settle bills, and a variety of other costs that could crop up. Getting a loan allows you to keep funds within the business without compromising other things you may require. By utilising a fixed monthly repayment plan, you will retain more cash within the business and thus increase your spending power, avoiding a cash flow drought. Many businesses choose to go down this route of getting a VAT loan as it can help avoid debt.
3. Spread the cost
By consistently financing your VAT bill, it is a constant flow of the funds in and out of your business. Fixed terms allow you to spread the cost of the bill rather than paying hefty upfront fees. Again, this will help you keep your cash flow secure by keeping it within the business.
"Spread the cost of your payments by financing your bill."
4. Peace of Mind
You will likely receive a reasonable sum to fund your VAT bill. Whilst it does include interest, fixed monthly repayments are more manageable than one sizeable lump-sum deduction.
- You retain funds in your business that you can use to fund other things
- Access to alternative funding lines
- Don't waste an existing bank facility
- You make payments directly to HMRC, who will receive the funds on time
- Quick and straightforward to arrange
- Fixed monthly repayment schedule
Financing your VAT bill can provide your business with a vital cash injection that you can use for other pressing areas of your business.
Who Can Access a VAT Loan?
Your business can access a VAT loan if it comes under any of these industries:
- Real Estate
Other eligibility factors are mentioned elsewhere (VAT-registered business, £85,000+ turnover, UK business, limited company, 1+ year trading).
"There are many different industries that can access a VAT loan."
How Do I Pay My VAT Bill?
There are a large number of ways you can pay your VAT directly. For it to get to HM Revenue on the same or next working day:
- Online or telephone through "Faster Payments"
- Online bank account
For it to arrive in three working days:
- Direct debit
- Standing order
- At your bank or building society
To ensure HMRC always receives funds on time, we recommend setting up a direct debit. You do not have to make the payment manually. As long as you ensure you submit the VAT return on time, the rest is automatic.
If you choose to finance your VAT bill, the lender manages all of this for you. Your payments go directly to HMRC rather than you doing it yourself and risking long processing times and late payment.
"There are a variety of options for how to cover your VAT bill."
What is Input Tax?
When it comes to VAT finance, there are two types of taxes: input and output tax. Output tax is charged on the sale of goods or services, while input tax is charged on the purchase. Input tax can be either refundable or non-refundable. If a business pays more in input than it collects in output tax, it can claim a refund from the government. However, if a business pays less in input than it collects in output, it will have to pay the difference to the government.
Input VAT is the amount added to the price when you purchase liable goods or services.
What are Payments on Account? (& Who is Required to Pay Them?)
Payments on account are advance payments towards your VAT. UK VAT registered businesses should make payments on account if they send their VAT bill quarterly or owe more than £2.3m over twelve months. Payments on account must be paid electronically and must be with HMRC by the end of the day on the due date. Regarding payments on account, your business makes payments to cover VAT liability, which will be resolved when it submits its VAT return.
Read about the alternatives to payments on account below.
Alternatives to Payments on Account
- Monthly Returns
Making payments on account and submitting a quarterly VAT return might not suit your business. If this applies to you, you can switch to monthly payments instead. To do so, you can apply online or fill in a form via the gov.uk website to change registration details. If you use an electronic payment method when submitting your VAT return, HMRC may grant you an extra seven days to make the payments. However, if you switch back to quarterly VAT returns from monthly, this extension will no longer be granted. Payments on account must be made from the first quarterly accounting period.
- Actual Monthly Liability
Rather than either of these options, your business can finance the previous month's actual liability without submitting the monthly VAT return. When you make your VAT return, you are doing it for the month prior. So, for example, the payment due in March is the actual liability for February. If your business has varying turnovers month on month, this may be the option that suits you best. If so, you must continue for the entire year. If you are "in credit" and prefer immediate repayments, you should opt for monthly returns.
"You are able to claim VAT back on business purchases"
Claim VAT Back
As a business owner, you can reclaim VAT funding back on eligible purchases. Unfortunately, claiming VAT isn't always a simple process, so it's necessary to look into the different schemes and rules that could apply to you. You can claim back VAT on anything you purchase for your business when you are registered. This claim can include office supplies, computers, company cars, travel expenses for work and services such as printers, accountants, or other external services. You can also claim VAT funding back on things such as food, drink and hotels for you and your employees if these have been used solely for the company and not your own use.
You may be able to receive a VAT refund if you are using services and materials to build a new home, convert a property, build a non-profit residence (e.g. a hospice), or build a property for charity.
These items are exempt from VAT, so they are not taxable. If you sell these goods & services, you won't have to charge your customers VAT on them; and if you buy them, then you won't be able to claim any VAT.
- Insurance, finance and credit
- Education and training
- Charity fundraising events
- Membership organisation subscriptions
- Selling, leasing and letting of commercial land and buildings
"Certain goods & services are exempt from VAT."
File Your VAT Bill on Time
Unfortunately, paying your VAT bill is something you have to do, and no business owner can get out of it. It may be tempting to wait and file it late if you are holding out for customer orders or additional paid invoices.
Sadly, this is not the case. You can accumulate fines that can heavily dent your bank balance by filing your VAT bill late.
Don't wait to be contacted regarding your VAT payment. Stay up to date on when you need to make VAT payments to ensure you are not paying them late.
As well as your VAT bill, you also have specific deadlines for which you need to apply for certain tax bill relief schemes. This deadline tends to be two years, but it is good to examine it individually to confirm what applies to your business. Make sure you file these in the specified time period to be sure you get the amount back that you are entitled to. Use a calendar reminder to ensure you don't miss the deadline and have plenty of time to get it sorted if there are any problems.
You should never delay paying your VAT, as your business is subject to several financial and legal obligations. A VAT bill is often a significant amount to fork out all at once, there are many benefits of finance as it is a quick and easy way to protect your funds. You don't want to face penalties if you are going through a period of uncertainty and don't know if you can make payments on time. Finance is a helpful safety net when used responsibly.
Additionally, it can be used to help grow your profits as you may need to save cash flow in other areas of the business to make a significant, profit-making purchase.
When applying for loans through Love Finance, you can get a hassle-free decision in as little as 24 hours. You will be able to choose your repayment terms, typically spreading the cost over three months/every quarter.
You can even choose to take a VAT loan every quarter if your credit allows it, but you are not under obligation to do, and you can get one as and when you need it.