Value Added Tax (VAT) is a tax on goods and services in the UK. Most businesses, including those in the CBD industry, need to understand VAT and its impact on cash flow, pricing, and compliance.
If you are VAT registered, you charge VAT on your sales, and in return, you can reclaim the VAT paid on purchases such as stock, equipment, or services. VAT registration can be beneficial at the start of a business when you’re making large purchases, even if you haven’t reached the VAT threshold yet. Once you hit the VAT threshold based on your turnover, registration becomes mandatory.
In this step, we’ll explain how VAT works, why businesses pay VAT, and how to strategically use VAT registration to your advantage when starting your CBD business.
1. What Is VAT?
VAT (Value Added Tax) is a consumption tax levied on the sale of goods and services in the UK. The standard VAT rate is 20%, but there are also reduced rates and exemptions depending on the type of product or service. CBD products, in most cases, are taxed at the standard rate.
1.1. VAT Rates:
Standard Rate (20%): Applies to most goods and services, including CBD products.
Reduced Rate (5%): Applies to some energy-saving products and children’s car seats (typically not applicable to the CBD industry).
Zero Rate (0%): Some goods and services (like most food items and children’s clothes) fall under this category, but CBD generally doesn’t.
2. Why Is VAT Paid?
VAT is paid by consumers, but businesses are responsible for collecting and remitting VAT to HM Revenue & Customs (HMRC). VAT is charged on the value added at each stage of the supply chain, from raw material suppliers to the end consumer.
2.1. VAT in the Supply Chain:
Businesses collect VAT on sales (output VAT) from customers.
Businesses pay VAT on purchases of goods, services, equipment, and stock (input VAT).
The difference between output VAT (what you’ve charged) and input VAT (what you’ve paid) is what you owe to HMRC, or you can claim a refund if input VAT exceeds output VAT.
3. VAT Registration: How It Works and When It’s Required
VAT registration becomes mandatory once your business’s taxable turnover (total sales, excluding VAT) exceeds the VAT threshold, which is currently £85,000 over a rolling 12-month period. However, businesses can voluntarily register for VAT at any time, even before reaching the threshold.
3.1. Mandatory VAT Registration:
Once your taxable turnover exceeds the £85,000 threshold, you must register for VAT and start charging VAT on your sales.
3.2. Voluntary VAT Registration:
You can register for VAT voluntarily even if your turnover is below the threshold. This can be advantageous, especially in the early stages when making large purchases for your business, such as stock or equipment.
4. Strategic VAT Registration: Benefits and Considerations
Many businesses, particularly new ones, can benefit from being VAT registered at the start to claim back VAT on large purchases, such as equipment, stock, or machinery. This strategy can improve cash flow during the early stages of the business. After claiming back the VAT, you can de-register and remain VAT-exempt until you meet the VAT threshold for mandatory registration.
4.1. Advantages of Voluntary VAT Registration:
Claim Back VAT on Purchases: If you’re VAT registered, you can reclaim the input VAT on expenses like stock, machinery, and other equipment, reducing your initial costs.
Improves Credibility: Being VAT registered can give your business more credibility, especially when working with other VAT-registered companies.
No Extra Costs for B2B Transactions: If most of your customers are businesses, they can reclaim the VAT you charge them, so voluntary registration may not increase costs for your clients.
4.2. Disadvantages of Voluntary VAT Registration:
Increased Administration: VAT-registered businesses must file regular VAT returns (usually every quarter) and keep detailed VAT records.
Potentially Higher Prices for Consumers: If your customers are end consumers (not businesses), they will pay 20% more for your products, which can make your pricing less competitive compared to non-VAT registered businesses.
De-registration Process: After reclaiming VAT on your purchases, you can choose to de-register for VAT until you reach the turnover threshold. This can be administratively complex, and you’ll need to notify HMRC of your change in status.
4.3. The De-registration Strategy:
Claim VAT on Startup Expenses: When you first register for VAT, claim back the VAT on all your major expenses (such as stock, equipment, and business-related costs).
De-register Before Reaching the VAT Threshold: Once your initial purchases are made, and if your turnover is still below £85,000, you can de-register from VAT to avoid charging it to your customers until you are required to register again.
Re-register When You Hit the Threshold: Once your business’s turnover exceeds £85,000 in any rolling 12-month period, you must re-register for VAT and start charging it on your sales.
5. VAT Filing and Compliance
When you are VAT registered, you must comply with HMRC’s filing requirements. VAT returns are usually submitted quarterly, detailing how much VAT you’ve charged and how much you’re reclaiming. Payments are made to HMRC for any VAT owed after balancing output and input VAT.
5.1. How to Submit VAT Returns:
VAT Online Account: Set up an online account with HMRC to file VAT returns digitally.
Making Tax Digital (MTD): VAT-registered businesses must comply with Making Tax Digital (MTD) requirements, meaning VAT returns must be submitted using HMRC-approved software. Ensure your accounting systems are compatible with MTD regulations.
5.2. VAT Penalties:
Failing to file VAT returns on time or incorrectly can lead to penalties from HMRC. It’s important to stay organised, maintain accurate records of sales and purchases, and file returns before the deadline.
6. How VAT Affects Pricing and Profit Margins
Being VAT registered means you must include 20% VAT in your pricing, which can affect the competitiveness of your products. If your customers are end consumers (B2C), they will bear the cost of VAT, which could make your products more expensive compared to businesses that aren’t VAT registered. If your clients are businesses (B2B), they can reclaim the VAT, so it won’t impact their decision-making.
6.1. Pricing Strategy:
Absorbing VAT: Some businesses choose to absorb the cost of VAT into their prices to remain competitive, which can reduce profit margins.
Passing on VAT: Alternatively, you can pass the VAT cost to consumers by increasing prices by 20%, ensuring that you maintain your profit margins.
7. Deciding When to Register or De-register for VAT
If you’re starting a CBD business and plan to make significant capital investments, it can be beneficial to voluntarily register for VAT to claim back VAT on your purchases. However, if your turnover is still below the VAT threshold, you might consider de-registering once your major expenses are covered, especially if your customer base is largely end consumers.
