VAT mastery for business: Essential Guide for Start-ups Crossing the £90K Threshold

Start ups and VAT

When does my Start-up need to start paying VAT?  Read our VAT expert Julie Green’s advice on the basics of what you need to know about making sure your Start-up is VAT ready. 

These are the key points you need to be aware of:

The magic number is now £90K. When the turnover of your business reaches £90,000, you must register for VAT with HMRC and start collecting and paying the tax on your eligible products or services.

With that magic number ingrained in your mind, here are some practical tips for making sure your start-up is ready for VAT:

• Keep an eye on your turnover figure – have a regular overview of your turnover (easy to do if you’re using a cloud accounting package like Xero) and check how close sales are bringing you to £90K. Once you’re close, start planning ahead for paying VAT.
• Do some financial housekeeping – it helps enormously if your financial processes are working efficiently and giving you the numbers you need. Clean up any messy accounting and give your finances a spring clean so you’re ready to roll.
• Register early! – as soon as you start approaching £90K turnover, consider registering for VAT. The registration process can take a number of weeks and the sooner you start, the more ready you’ll be for the additional admin that VAT requires.
• Plan your quarterly VAT payments – your business is responsible for paying VAT to HMRC every quarter. So it’s sensible to have a separate deposit account for VAT and to work those payments into your budgeting and cashflow for each quarter.

You can register for VAT even if you’re not up to the £90K mark. Some start-ups will register for VAT early if their sales are to other VAT registered businesses or to add a little kudos to the brand and give the impression they’re a bigger concern. Please do get in touch and speak to our team of experts if you need any advice on your start-up, we can help you every step of the way with your business. 

Registering right from the start does show prospective customers and investors that you’re serious about growth. But bear in mind the potential impact of paying VAT and the effect it can have on cashflow and margins.

How tricky is VAT to set up?

Registering for VAT isn’t hugely complex – if you’ve got some finance experience, you could do it yourself.

But there’s real value in getting your accountant involved right from the beginning. Anything to do with HMRC can make people nervous, and working with a VAT specialist helps to remove any worries – and frees up your time to focus on growing your start-up.

There are different ways to account for VAT, and an accountant can help you decide on a method that makes the most sense for your business.

Accrual accounting The accrual method involves paying your VAT based on the invoice or purchase date. So, if you invoice your customer in one VAT period but don’t get paid until the next quarter, that VAT is payable in the earlier period.

The cashflow problem If your invoices don’t get paid on time, that racks up debt and you can end up with cashflow issues at the point when VAT is due.

Cash accounting To simplify the VAT process for small businesses, you can use cash accounting (if your turnover is under £1.35M). With this method, you account for VAT only once payment has been received, not from the date the invoice was sent – removing the potential cashflow issue.

Flat-rate scheme To make VAT even easier, you can also apply for the flat-rate scheme if your turnover will be £150k or less in the next year. You continue to charge VAT at the relevant rates, but when it comes to paying HMRC, you pay a simple flat rate on everything. You simplify your bookkeeping, pay less in VAT and keep money in the business to invest in growth.

VAT needn’t be taxing

So, there you have it. VAT’s not as scary as you thought, is it? With the right awareness, forward planning and professional advice you can make VAT work for your business – and even improve your cashflow and annual profits. Our top 3 action points are:

• Move to cloud accounting to keep a close eye on when that £90k turnover is close and be ready for Making Tax Digital.

• Plan your tax costs and squirrel your VAT away so it’s ready to pay each quarter.

• Talk to an accountant and use the accounting method that best suits your start-up.

Please note that the VAT registration threshold has been updated to £90,000 effective from 1 April 2024. It’s important to stay informed about such changes as they can significantly impact your business operations and financial planning.

Whatever 2024 has in store, we are on hand to help you navigate the changes coming down the line, please get in touch with your local Haines Watts office if you need any help with any of the points mentioned above, or wish to start a conversation with us about your business we look forward to hearing from you.

If you are interested in finding out more about the services we offer and how it can benefit your business, please do get in touch.