Once you are registered for VAT what changes do you need to make to your bookkeeping process? What does this mean for your customers? And what do you need to think about when preparing your first VAT return?

1. Increase your prices

Unless you want to cover the additional VAT burden yourself, you will need to increase your prices to cover the VAT that you will need to account for on your sales.

If your customers are VAT registered businesses, then this won’t really impact them – they will be able to recover the additional VAT that they have paid in their own VAT return.

The problem comes when you are selling to consumers who are not VAT registered. The VAT burden passes on to them. You will need to look at your own pricing and that of your competitors to see how much you can pass on to your customers.

2. Consider cash or accrual accounting for VAT

You can choose whether to account for VAT on:

  • cash basis – when invoices are paid or;
  • accrual basis – invoice date

The cash basis is favoured by businesses who give their customers credit, so your VAT liability increases as your customers pay you.

The accrual basis is favoured by retailers and businesses who tend to receive payment at the point of sale. This allows you to recover VAT on your purchases before you have paid for them.

3. Add your VAT number to your sales invoice/receipt

If you provide invoices or receipts to your customers, they must include your VAT number so your customer can recover the input VAT on their purchase from you.

If you issue till receipts to your customers, you will need to make sure that your VAT number is visible on the copy that you give to your customer.


4. Systemise and automate your VAT processes

If you are using spreadsheets for your accounts, now might be a good time to automate and systemise.

If you are trading at large enough volume to be VAT registered we would recommend you use a proper accounting system not rely on a spreadsheet to manage your accounts. It may seem quicker, easier and cheaper but I estimate that 80-90% of spreadsheet accounts and VAT calculations that we have checked and reviewed have had errors in them.

It’s just not worth it. If you are running a serious, viable and sustainable business, then you should be able to afford the small monthly cost of a proper accounting system.

You can capture all your VAT records, reconcile your bank, keep a robust audit trail with PDF attachments, file your VAT returns quickly and use the watchlist function to keep an eye on your current VAT liabilities to avoid nasty surprises at the end of the quarter.

We suggest:

  • Xero for your business accounts
  • Xero Files – forward PDFs from your inbox, drag files from your computer and snap images with your phone to bring invoices and receipts into Xero ready for you to process

5. Keep track of VAT invoices and receipts

If admin is not your strong point or you are looking for further efficiency in your accounting process – you might like to use Receipt Bank or AutoEntry to push those bills into Xero for you.

Forward PDFs from your inbox, drag files from your computer and snap images with your phone to bring invoices and receipts into Xero. Receipt Bank and AutoEntry will extract the key data so all you need to do is check and approve the invoice in Xero.

Don’t miss out on the recovery of VAT from your purchases by losing the invoice or receipt.

6. Ask for the VAT invoice or receipt

Always be sure to ask for the VAT invoice or VAT receipt on your purchases you make for your business.

Purchase or input VAT can only be recovered on an invoice or receipt that meets the definition of VAT invoice. The VAT number must be clearly visible on the invoice or receipt.

VAT cannot be reclaimed on an Order, Proforma, Quote, Proposal, Remittance Advice, Delivery Note, Credit Card Slip or where the VAT number is not clearly visible on an invoice or receipt.

Lost invoices can often be re-issued by your supplier but lost receipts often can’t be, so if you lose the receipt then you can’t claim the VAT back.

7. Understand the ‘Wholly and Exclusively’ rule

Make sure you understand the wholly end exclusively rule.

VAT can be recovered on business spends that are wholly and exclusively incurred for the purpose of the VAT registered trade. The cost must relate to the VAT taxable goods or services that you supply.

If you have bought a TV for your home, you can’t put it through the business and reclaim the VAT on it.  If you have bought a PC that is 50% for business use and 50% for personal use, then you may only recover 50% of the VAT based on your business use.

8. Reclaim VAT on historic purchases

You can backdate your VAT claim to recover VAT on purchases made before registration if these conditions exist.

  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services

You can reclaim the VAT in your VAT return (Box 4). You will need to keep:

  • invoices and receipts to show you paid VAT on the purchase
  • a description and purchase dates
  • information about how they relate to your business now

9. Understand the VAT implications of trading outside of the UK

Trading outside the UK can be quite complex, so do take VAT advice on your particular situation if you are unsure. Here are some super quick general guidelines of the VAT implications of

  • Trading outside the EU – These sales are outside the scope of VAT, this means any sales or purchases will be accounted for with NO VAT
  • Trading with businesses in the EU – will be zero-rated if you provide your supplier with your UK VAT number or your customer provides you with their EU VAT number. If you are signing up for subscription services look for the box that allows you to enter your UK VAT number. This will allow the supplier to Zero rate your supply.
  • Trading with businesses in the EU – will be standard rated if trading with a non-VAT registered business
  • Trading with consumers in the EU – VAT will be charged at the rate of VAT in the buyers country under the VATMOSS scheme. That’s a hole different article!!

There is a lot to think about when you first register for VAT – call us if you need any help.




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