How to Reduce your VAT Bill

How to Reduce your VAT Bill

As a small business owner or sole trader registered for VAT, you must pay charge VAT on the goods and services you supply, and then submit the VAT collected to HMRC. All businesses strive to reduce their taxes within the boundaries of the law. These slight differences in profit margins can lead to significant financial gains and improve the flow of cash in your business.

The VAT paid to HMRC is known as Business VAT. However, there are ways, various schemes and rules under which you can reduce VAT bill. This blog aims to provide you with how to reduce VAT bill, helping you save money and improve your cash flow.

How to Reduce your VAT Bill

Understanding how to reduce your VAT bill accurately is important so that you won’t end up paying more than you have to. Below are some effective ways to reduce your VAT bill.

Select the Right VAT Scheme

When signing up for VAT, you can choose which VAT scheme you want to use. It is crucial to select the correct VAT scheme for your business because it affects how you calculate your VAT return and how often you need to submit it to HMRC. By selecting the right VAT scheme for your business, you can have more control over your cash flow.

Here are some of the schemes:

Standard VAT Scheme

This is the default VAT scheme option when you first register for VAT with HMRC. It’s very simple: subtracting VAT invoiced sales from VAT invoiced purchases yields the amount of VAT owed to HMRC.

This VAT scheme allows you some flexibility and control over your cashflow between quarters. If you notice that you have made a lot of sales but not many purchases, you can move some of your sale invoices to the following quarter. This allows you to defer VAT payments until the next quarter, when you are more likely to make purchases and thereby reduce your VAT payments.

Cash accounting VAT Scheme

With cash accounting VAT scheme, you account for VAT on the date you are paid, rather than when you issue the invoice. This is especially useful if you have slow payers, as you won’t have to pay VAT until you’re paid.

However, this approach is not well suited to enterprises who purchase many things on credit. You cannot reclaim VAT before payment is finished. As with the standard VAT accounting scheme, you must still submit your returns every quarter. Businesses having an annual turnover of more than £1.35 million are not eligible to adopt the cash accounting scheme.

VAT annual accounting scheme

This is similar to the standard VAT scheme, the only difference is you don’t fill in quarterly returns. Rather, you have a yearly VAT reporting and payment deadline. 

This scheme allows you to budget more carefully, and because payments are spaced out across the year, it is often more beneficial to cash flow. However, you may end up overpaying or underpaying HMRC at times, necessitating a final balance payment or a refund request. Businesses having an annual turnover of more than £1.35 million are not eligible to use the yearly accounting scheme.

VAT flat rate scheme

The flat rate scheme can help small firms save on VAT because the fixed rates are lower than the regular 20% VAT rate. However, one disadvantage is that you cannot claim back on VAT payments like you would with other VAT schemes until you have purchased a capital asset worth more than £2,000 including VAT.

Make your business expenses VAT-efficient

Running a business entails spending on more expenses, including travel costs, insurance, phone bills, and internet fees.

You can use these charges to offset company profits and effectively minimise your VAT bill.

An excellent example is the internet bill of the company’s owner or director. If you own your own firm, you will undoubtedly use your internet connections for business-related work.

HMRC will accept a reasonable division of business and personal expenses, as well as any additional expenses that are largely or primarily private.

The same is true for the acquisition of things with partly business use, such as phone call expenses, computers, and printers.

You can also submit a back claim if you failed to include these expenses on a previous VAT return.

Manage your Cash Flow Smartly

As a new or established business, it is important to manage your cash flow strategically. For example, extending payment terms will cost you money, which is not good for business. Instead, implementing an intelligent system that automatically recognises problematic loans that are more than six months old is beneficial. 

Then you can reclaim the VAT component of the outstanding amount and only pay HMRC when the debt is paid. Many businesses resolve bad debt issues annually, wasting the relief you might have received earlier. 

However, if your turnover is less than £1.35 million, you can employ cash accounting strategy and receive automatic bad debt relief without waiting for six months. So, to avoid all of this difficulty, a clever VAT return services are essential. They will identify all schemes and bad debts and take prompt action to save every penny.

Accurate Record-Keeping

Maintaining careful records is not only good practice; it is a legal duty for VAT-registered businesses. Use accounting software, such as Xero or QuickBooks, to automate this process is important. These programs can connect to your bank accounts, categorise transactions, and even calculate your VAT due, making it easier to complete correct taxes and receive qualifying deductions. 

Keeping accurate records also helps to identify any areas of waste or inefficiency, helping to reduce costs. Additionally, it can provide valuable insight into customer spending habits and trends, allowing businesses to better tailor their products and services.

Budget for your VAT Bill

To keep a healthy financial structure, it’s vital to budget for your VAT bill. Understanding your VAT liability ahead of time might help you budget more successfully. 

All you have to do is set up a separate bank account just for VAT and other tax liabilities. Each time you get a payment, make sure you deposit a percentage equal to your VAT rate to this account. This guarantees that you have the funds available when it is time to pay the payment.

Regular VAT Audits

It is also important to always take a proactive approach in carrying out regular VAT audits.

This can help businesses identify errors or omissions in VAT accounting. It can also help in correcting mistakes before they become problems, potentially saving businesses from high penalties and fines.

Business Splitting

Business splitting, also known as disaggregation, is the legal act of dividing a business into two or more businesses so that multiple VAT registration levels can be used and one or more of the businesses are exempt from VAT.

This is tax planning, and, while it is legal, it must be properly executed because HMRC can challenge business structures if the split is not legitimate or properly implemented.

Also, there is a huge danger if business restructuring for VAT is not adequately planned and executed.

Reclaiming your Pre Registration VAT

According to HMRC, Generally, you can reclaim VAT on products or goods bought up to four years before you registered for VAT and services acquired up to six months before you registered, as long as the following conditions are met:

  • You bought the goods as the entity that is now registered for VAT.
  • The products are for your VAT-taxable commercial purpose.
  • The items are still owned by you, or they were used to making additional products that you still hold.

Conclusion

In conclusion, regardless of your business strategy, always handle your cash and accounts ahead! Always keep track of everything and get a professional to assist you with taxes. Taxes are required, but you may stay completely legal while still saving money.

Get Professional Help for VAT

With the complexities of VAT regulations and the potential for significant financial impact, having a professional tax accountant on your side can make all the difference. Our team at Q Accountants will be happy to offer, no obligation discussion on how to reduce VAT bill. Book a discovery call today