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Are we unpaid tax collectors?

17 June 2024

Business owners often refer to VAT as if it were a cost to their business regardless of their VAT position; whether they are registered for VAT or not.

Business owners often view VAT as a business cost, regardless of their VAT registration status.

If you don’t have VAT registration, you don’t need to add VAT to your sales. You also can’t recover any VAT on purchases. In this case, VAT becomes a cost.

When you have VAT registration, the cash you collect from customers includes VAT, if the sales are VAT-eligible. You pay the collected VAT (minus any VAT on purchases) to HMRC. You collect VAT from customers, pay VAT on purchases to suppliers, and pay the difference to HMRC. So, there’s no overall cost to your business.

Being VAT-registered doesn’t affect profitability. But, if you must pay VAT on sales before customers pay their bills, it can cause cashflow issues. HMRC allows those affected to use a process called cash accounting for VAT. If you qualify, you pay VAT on sales only when customers pay you. Similarly, you can reclaim VAT on purchases only when you’ve paid for them.

So, VAT-registered businesses act as unpaid tax collectors.

Law obliges us to maintain our records in a specific way. We must also make payments to HMRC following strict rules for filing and payment.

The government doesn’t compensate us for our time spent on record keeping, filing, and payment obligations. We face penalties for missing filing and payment deadlines.

Understanding these aspects of VAT can help businesses plan better. It’s crucial to stay informed about VAT rules to avoid penalties and manage cash flow effectively.

Source: Other Mon, 17 Jun 2024 00:00:00 +0100

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