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Third of micro businesses are unaware of VAT obligations

27 per cent of small businesses cease trading to avoid VAT threshold

20 April 2015

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36 per cent of UK micro businesses are unaware of the VAT registration threshold and could unwittingly end up being fined by HMRC.

Approximately 780,000 businesses could be affected by unexpected fines while on the other hand, over 122,000 businesses limit their sales specifically to avoid the reaching the threshold, research from Direct Line for Business has revealed.

Businesses with a turnover of VAT taxable goods of over £82,000, for any preceding 12 month period, must register for VAT.

The penalty for failing to register within nine months of the threshold being breeched is 5 per cent of the tax amount due, this increases to 10 per cent if registration is late by 9-18 months, and anything over 18 months late is liable to a 15 per cent penalty.

Jasvinder Gakhal, director of Direct Line for Business, said: 'We are a fantastically entrepreneurial nation with increasing numbers of businesses being started all the time, but these companies still have tax obligations even if they are run out of a bedroom or a garage'.

'It is important small business owners identify what products, goods and services are liable for VAT. Companies producing food and drink for example, need to check regulations carefully as they may sell items that are zero rated, or standard rated for VAT.'

Ghakhal thinks that the problem lies in businesses over prioritising increased sales and expansion, and neglecting their business management obligations.

He believes that the only way for businesses to avoid unnecessary fines is to fully inform themselves, especially given that the information is freely available.

'To avoid unwelcome financial penalties and to reduce business risk it is important to read up about what you do or don't have to pay as a business and identify if there are relevant insurances you can take out to reduce the impact in the event of an incident, such as fire, flood or theft of stock'.

Meanwhile the research also shows that 27 per cent of businesses completely ceased trading in order to avoid VAT, as this allows them to offer goods and services at a lower price than their competitors.

Information on VAT registration can be found here.

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Tax & Wealth structuring