Filing your VAT return

We recently registered for VAT and I had to file my first quarterly return. It was quite a headache and I had an accountant to help me. So how does it all work?

Your business must register for VAT if the goods you are selling pass a threshold set by HMRC. The VAT threshold for 2014 is £81,000. It goes up each year so be sure to look it up on HMRC's website: http://www.hmrc.gov.uk/vat/forms-rates/rates/rates-thresholds.htm#2

Sounds simple enough. But as our business sells online mainly via Ebay and Amazon we came across all kinds of problems. Firstly we were only counting the income which Amazon passes on to us every fortnight. But, the sales income has to be what is being charged to the customer. Therefore our accounts now show what the customer paid (including postage) and then the portion that Amazon takes in seller fees.

The next challenge we had was that from everything we read on HMRC's website we understood that sales outside of the EU are exempt from VAT. Whilst this is true, those sales still count towards the threshold. So, if you sold £81,000 worth of goods, and £10,000 were to the USA you would still need to register for VAT but only pay VAT on the £71,000 sold here in the UK or in the EU.

Just to clarify, you pay VAT on goods sold within the UK and also goods sold within the EU. At the moment the VAT rate is 20%, so you need to factor that into your sales price.

Our final challenge was that some of the items we sell are zero rated for VAT. We sell baby clothes and items on which VAT is not charged. You do not include those sales in your calculation of the VAT threshold. So if our overall sales were £81,000 but £10,000 of those were of baby clothes then we would not need to register for VAT.

As it turned out we were well past the threshold and because of this misunderstanding about including our worldwide sales we registered late for VAT. We had to fill in a form to explain why we were registering late, and we were liable for a penalty or a fine. Thankfully HMRC accepted that this was a genuine mistake and we did not have to pay a penalty.

Remember, when calculating the VAT threshold you need to use a rolling 12 months figure. So whilst your accounts might show what you made during 2013, you need to look at what you made in the previous 12 months from now.

So what has registering for VAT done for our sales? We have had to put the prices up, but not by 20%. On the items for which we charge VAT (usually maternity clothes) we are already paying VAT to our suppliers when we purchase the items. When you do a quarterly VAT return you have to calculate what you have already paid in VAT to any of your suppliers.

Sales have definitely been affected by us registering for VAT but we diversifying in order to compensate. We are increasing our products which are exempt from VAT and also working harder to make sure our prices are as low as possible and that we offer sales all across the world.