Let's be honest, getting that VAT bill from HMRC is rarely a moment of joy for any small business owner. Crossing the £90,000 turnover threshold is a sign of success, but the admin and cost can feel like a penalty for growth.
But what if you could legally reduce that figure?
Managing your VAT effectively isn't about finding dodgy loopholes; it's about understanding the system and making sure you're not paying a penny more than you need to. By being smart and organised, you can significantly improve your cash flow and reduce your payments to HMRC.
Here are ten practical ways UK small businesses can tackle their VAT bill.
1. Plan Your VAT and Business Structure Carefully
Proactive VAT planning, with expert support, can legally reduce liabilities. One key area is ensuring your business structure is appropriate and not subject to 'disaggregation' rules.
For example, imagine you run a plumbing business through your limited company, and you also have a side hustle cleaning carpets, run through the same company. The combined turnover exceeds the £90,000 VAT threshold, forcing you to register.
However, if these are genuinely separate business activities, they could potentially be run as separate legal entities (e.g., one as a limited company, one as a sole trader). If each entity's turnover remains below the threshold, neither may need to register for VAT. This is a complex area known as disaggregation, and HMRC has strict rules against "artificial separation" done purely to avoid VAT.
Crucial Note: You must seek professional advice before making any decisions on business separation to ensure you are fully compliant with the VAT Act.
2. Charge Your VAT Correctly from Day One
Once you're VAT registered, you act as a tax collector for HMRC. This means you must add the appropriate VAT rate (usually 20%) on top of your prices for goods and services. Many business owners worry this will make them uncompetitive, so they absorb the cost themselves. This is a critical mistake.
The VAT you collect is not your income. It belongs to HMRC. Failing to add it to your prices means you are paying the government out of your own pocket and directly hurting your profit margins. Be upfront with customers; VAT is a standard part of business for any growing company.
3. Claim Every Penny of Input VAT You're Entitled To
This is the absolute foundation of VAT management. Input VAT is the VAT you pay on goods and services for your business. You can reclaim this from HMRC, directly reducing the amount you owe. Too many businesses miss out.
Are you claiming for everything you can? Common examples include:
- Stock and raw materials for producing your goods.
- Office essentials: Stationery, software subscriptions, and computer equipment.
- Overheads: The VAT portion of your business utility bills.
- Professional fees: Your accountant's or solicitor's fees.
- Marketing and advertising costs: Including website hosting and online ad spend.
Action Point: Go through your expenses from the last quarter. Have you got a VAT receipt for every business purchase? If not, make it a habit to always ask for one.
4. Choose the Right VAT Scheme for Your Business
You don't have to stick with the standard VAT scheme. HMRC offers several alternatives designed to simplify life for small businesses.
- The Cash Accounting Scheme: Pay VAT when you get paid, not when you issue an invoice. This is a game-changer for cash flow, especially if you have slow-paying clients. Eligible if your turnover is £1.35 million or less.
- The Flat Rate Scheme: Pay a single, fixed-rate percentage of your turnover to HMRC, simplifying your bookkeeping. This can sometimes result in paying less VAT, but you generally can't reclaim input VAT. You must calculate if it's right for you. Eligible if your turnover is £150,000 or less.
- The Annual Accounting Scheme: Submit one VAT return per year instead of four. This reduces admin and helps with budgeting through regular advance payments.
5. Reclaim VAT on Fuel and Mileage
If you or your employees use vehicles for business, you can reclaim VAT on fuel. You have two main options:
- Reclaim all VAT on fuel and pay a fixed "fuel scale charge" to account for private use.
- Only reclaim the VAT on fuel used for business journeys, which requires keeping detailed mileage records.
For most small businesses, keeping a mileage log is often more tax-efficient.
6. Understand Bad Debt Relief
Don't pay VAT on money you never received. If a customer fails to pay an invoice and the debt is over six months old and written off in your accounts, you can reclaim the VAT you originally paid to HMRC for that sale.
7. Know the Difference: Business vs. Staff Entertainment
This is a common point of confusion. The rules are clear:
- Entertaining clients or customers: You cannot reclaim VAT on this.
- Entertaining staff: You can reclaim VAT on staff parties and events (like a Christmas party), provided the event is for all staff.
8. Claim for Pre-Registration VAT
Did you incur costs before your business was VAT registered? You may be able to reclaim that VAT on your first return.
- You can go back 4 years for goods you bought that you still own or have used to make other goods you still hold.
- You can go back 6 months for services.
This can provide a welcome cash injection right when you need it.
9. Use Strategic Timing for Purchases & Invoices
This is a simple but effective cash flow tip. If you are about to make a large business purchase near the end of a VAT quarter, consider bringing it forward. This allows you to reclaim the input VAT sooner, reducing the immediate bill. Conversely, you could delay issuing a large sales invoice until the start of the next quarter, giving you three extra months to hold onto the cash before paying the output VAT.
10. Shift Your Mindset: See VAT as a Growth Metric
Finally, change your perspective. It’s impossible to make a profit from the VAT you collect, and it’s impossible to avoid registration once your turnover hits the threshold. Instead of seeing VAT as a problem, accept it as a sign of success. Your business is growing! Focus your energy on continuing that growth and improving profitability, treating VAT management as just another professional part of running a successful enterprise.
Disclaimer: This blog post is for informational purposes only and does not constitute professional financial or tax advice. You should always consult with a qualified accountant to discuss your specific business circumstances.
