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Understanding VAT for small tech businesses

David Redfern, director of DSR Tax Claims, breaks down what small tech businesses need to know about Value Added Tax.

Tax is rarely at the forefront of the mind when setting up and running a business, with most effort being made in making the business viable and profitable. As a result, VAT is often an afterthought for many small businesses within the technology arena – whether retailers or providers of digital services. However, HMRC rarely takes ignorance of the law as an excuse for not following the law, so let’s look at VAT and whether your business comes within its scope.

What is VAT?

VAT, or Value Added Tax, is a business tax on certain goods and services supplied by a business. This includes electronically supplied services or products, for example, digital services or apps which your business charges for. Only VAT-registered businesses can charge VAT but once a business is registered with HMRC for VAT, it must charge VAT on all the goods and services it sells which come within the scope of VAT. This revenue is then paid to HMRC. A VAT- registered business can also reclaim the VAT on any business purchases it makes which are subject to VAT, which can be offset against its own VAT bill.

Not all goods and services are subject to VAT – certain goods and services are considered to be exempt. Few of these relate to the tech industry – although certain financial and insurance services are exempt from VAT, as are a number of aids for disabled people as well as work provided for a charity.

When should you register for VAT?

Businesses with a VAT-taxable turnover of £85,000 per year are required to register with HMRC for VAT and there are penalties for businesses which fail to register. However, unlike other taxes, VAT-taxable turnover is measured on a rolling basis rather than by tax year or accounting year – this means that businesses which are close to that turnover threshold need to keep a close eye on turnover to ensure that they don’t exceed the threshold without realising. Businesses can also register voluntarily if they wish. Once a business is registered for VAT, it is required to provide a VAT return to HMRC on a quarterly basis, detailing all the VAT it has charged on its goods and services and all the VAT it is reclaiming from its business purchases. With its MTD (Making Tax Digital) scheme now rolled out to the VAT scheme, businesses need to ensure that their accounting software is capable of communicating digitally with HMRC software.

The standard rate of VAT is 20% and that is the rate charged on most VAT-taxable goods and services. However, there are a few which are rated at 5%.

Are there any rules specific to tech firms?

Depending on the area of your business, certain digital services are subject to different VAT rules.

Because digital services can be provided across national borders, your business may have to register for the VAT MOSS scheme in order to account for its sales within EU countries. This includes businesses which supply certain telecoms equipment as well as those supplying electronically-supplied services, such as web hosting or software and software updates. These rules don’t apply to businesses which may use some method of electronic communication or facilitation, such as using an online shop to sell a physical product, where the online front is just the method by which it communicates with its customers.

The threshold for the VAT MOSS scheme is different to that for domestic VAT but in order to register for the VAT MOSS scheme, you also need to register for the domestic VAT, even if you are below the threshold.

Because businesses within the technology industry can vary wildly in the span of their goods and services, especially the growing market of providing digital and electronically supplied services, expert taxation advice can often be required to ensure that you remain within the law.

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