Wondering if small businesses pay VAT may be pretty low on a founder’s concerns list when running a small business. Amid the onslaught of other business demands such as sales, marketing, operations, customer service, and logistics, VAT/Tax registration and compliance is usually pushed to the bottom of the list. So, do small businesses pay VAT? The short answer is yes –– it is critical for small businesses to pay VAT if they meet the threshold. This guide explains everything a small business needs to know about paying VAT.
Why do I need to pay VAT as a small business?
No matter the size of your business, once you cross a particular turnover or sales threshold, your business will be liable to register for VAT.
But before we dive further into understanding why small businesses need to pay VAT, it might be worth distinguishing between the two types of VAT that we’re talking about. The two main types of VAT include output VAT and input VAT.
Output VAT (VAT you charge your clients and pay to VAT authorities)
If your business meets the VAT threshold, then your business must register for VAT. A business reaches the VAT threshold when a certain amount of turnover or sales revenue is reached. This taxable turnover differs from country to country.
To clarify, it’s worth noting at this point that VAT can also be called sales tax, liability tax, or output VAT/Tax. To illustrate, it is the tax you charge on your own invoices to your customers. Subsequently, your business then has the opportunity to report and file your output VAT against your input VAT (VAT incurred on supplier or vendor invoices) on a monthly, bi-monthly, or quarterly basis, depending on the country’s VAT regulations.
Input VAT (VAT you pay to vendors and then claim from your VAT authority)
Furthermore, all businesses, no matter how big or small, will always be liable to pay input VAT. input VAT occurs on any cost from a vendor or supplier, both locally or cross-border. However, input VAT for certain expenses is claimable once your business registers for VAT.
Looking for tips on how to pay less VAT? Although it is unlikely that you’ll ever be in a net income tax position, it still helps to claim your input VAT against your output VAT to reduce compulsory VAT payments to the relevant tax authority. For more information on how to improve your VAT compliance and save costs on your domestic VAT payments, visit our dedicated Domestic VAT page.
Resident VAT obligations vs. Non-Resident VAT Obligations
There are two scenarios where a small business may be required to register for VAT - locally (resident) or within a foreign country (non-resident) if cross-border taxable sales are being made.
Resident VAT Obligations
Resident VAT obligations affect businesses that reside in their own local countries. Every country in the world has its own local laws surrounding VAT/GST/Tax obligations. When a business hits a particular sales threshold, you are obligated to register for VAT and start charging VAT to your customers. In addition, your business must report on and pay over the sales tax/output VAT to your relevant VAT authority.
Most small businesses are able in some ways to cope with the value added tax administration in their own countries. However, it becomes complicated when you need a VAT registration number in a foreign country or when you may have the need for multiple foreign VAT registrations. That’s because you’ll need to have in-depth knowledge regarding each VAT authority’s requirements for compliance, and language barriers and administrative burdens may become a hindrance for a small business.
Non-Resident VAT Obligations
If your company is doing business in foreign countries (i.e making sales in that country) and you reach that country’s local VAT threshold, you will be obligated to register for VAT in that country and start reporting and filing the output VAT on your sold goods and/or services. This also means you will be eligible to claim back your input VAT from the relevant local VAT authority once registered.
This can get tricky for small businesses that may not have the resources to manage foreign VAT registrations and domestic VAT compliance demands in one (or many!) foreign jurisdictions. Therefore, many small businesses choose to centralize and outsource their managed VAT compliance to third-party advisors such as VAT IT.
Why? Because we’re able to help you maximise your input VAT claims while ensuring your output VAT filings are 100% compliant. This allows VAT registered business owners to rest easy knowing they’re saving money via input VAT returns and that there will never be harmful penalties imposed by VAT authorities further down the line.
What is the VAT threshold for small businesses?
The VAT threshold in any country is determined by a certain amount of turnover/sales/revenue being reached. For example, in the United Kingdom, a company must register for VAT when their business hits an annual turnover of 85,000GBP. These VAT thresholds are not a set number, and they often change from year to year. View our country-by-country guide to VAT thresholds to check whether your small business may need a VAT registration number.
What is the VAT rate for small businesses?
Standard VAT rates are determined by a country’s local VAT authority. There are no differences in VAT rates based on company size. However, VAT rates can differ based on expense type. For example, in France, there is a different VAT rate for food/entertainment vs. hotel accommodation.
Ultimately, the VAT rates that your business will charge to your clients will be based on the nature of your supply. Therefore, it is important to understand what expense type your service falls under and charge accordingly. VAT authorities tend to revise and change the VAT rates within their countries on occasion, so it’s important to stay on top of these developments to remain compliant.
Why are small businesses not VAT exempt?
The short answer to this question is that no business is truly VAT exempt. A business
need not register for VAT only if its turnover is below the VAT registration threshold. Other than that, all businesses are legally required to register for VAT once thresholds are met.
May show your clients that your business has a higher level of permanence
Many prospects prefer to deal with VAT-registered businesses
Smoother customs clearance for importers
How can a small business avoid paying VAT?
You’re not going to enjoy the answer to this question. Because the fact is that no business can avoid paying input VAT/GST or charging output VAT and accounting for it to your local VAT authority. Ultimately, in order to avoid having to charge output VAT, your business would have to remain under the VAT threshold forever. Avoiding input VAT is impossible as VAT or value added tax exists on almost all vendor expenses and bought goods.
How to save VAT as a small business?
Although there is no way to avoid paying VAT as a small business, there are ways to claim your input VAT to reduce your overall VAT expense. You can work with a third-party consultant such as VAT IT to extract your expense data and automatically determine, collate and recover your claimable input VAT for both cross-border transactions as well as local costs.
Paying VAT as a Small Business
Ultimately, small businesses are not exempt from the responsibilities of VAT compliance. However, unlike large multinational businesses or even large national companies, small businesses may lack the central finance or VAT teams necessary to make the administration easier. Therefore, small businesses should employ the help of outsourced VAT recovery and compliance experts such as VAT IT to alleviate the complexities and burden on internal resources.
Every small business is different and you may require unique and customised solutions for your structure. That’s why it helps to talk to a VAT expert who can guide - the good news is, we do those consultations for free. Get in touch.