Businesses face many types of taxes that they pay to the government. The type and amount of taxes depend on the business size, operations, and other related factors. For instance, startups and small businesses commonly pay employment and income taxes. On the other hand, a corporation’s net income isn’t taxable unless the company distributes it to the shareholders through dividends. Another example of a tax that businesses manage is VAT.
As you can imagine, any savvy entrepreneur knows that having a good VAT strategy can majorly impact your bottom line. This post will show you the top 5 ways a good VAT strategy can impact your business.
What Is VAT?
A value-added tax (VAT) is also called a goods and services tax, a general tax applying to all products and services sold. All consumers who buy taxable goods and services must pay VAT through the seller.
How To Compute VAT?
Because value-added taxes are percentage-based, customers pay higher VAT for goods and services at higher prices. Consumers can compute VAT manually or by using a VAT calculator.
The gross amount manual computation formula is net price X 1 plus (VAT rate). For instance, you can compute the 20 percent VAT of a taxable product or service by multiplying the net amount by 1.20 to obtain the gross amount. On the other hand, you can divide the gross amount by 1.20 to get the VAT amount.
5 Ways A Good VAT Strategy Can Impact Businesses
But how can a good VAT strategy impact your business? Read on to find out.
1. Promotes Good Tax Legal Compliance
Tax computation and collection can be a tedious process. Businesses can consider VAT as the best solution to pay taxes to the government straightforwardly. VAT is transparent and easy to administer compared to other tax systems.
A good VAT strategy enables you to comply with tax laws stress-free. It minimizes or eliminates tax filing problems, such as tax evasion or not paying taxes. These tax problems have serious legal and business consequences.
2. Gains More Loyal Customers
A good VAT strategy can help entice more customers to return to your business. First, customers know that legitimate businesses impose VAT. Therefore, they gain peace of mind that you cover them if ever something goes wrong with the product or service you offer.
You can acquire more customers by offering installment payments for your products and services. This payment scheme helps your customers pay in smaller amounts monthly using their credit cards. In that way, the VAT is also smaller.
If you price your products and services reasonably and impose the VAT rate, you’ll have more competitive pricing than others. Hence, strategic pricing and VAT collection mechanisms can help boost customer loyalty. It means more sales and long-term high revenue for your business.
3. Establishes A Good Business Reputation
As mentioned, VAT payments make you a trustworthy, legitimate business. Consumers perceive businesses that collect VAT as large, established companies.
Businesses must have a VAT registration number for sales exceeding a tax registration threshold. This threshold is 200 transactions or US$100,000 in sales over 12 months in most states in the United States.
So, if you have a VAT registration number, most consumers will think that your business is large enough. Therefore, your company is trustworthy. You can show your VAT registration number on your invoice forms, website, and other paperwork to boost your business credibility and reputation.
4. Promotes Business Growth
As a business owner, you must know the relevant VAT implications to your company for smoother business operations.
Having VAT can help promote your business growth because you can qualify to work with other businesses. If your business isn’t VAT-registered, other companies will think twice about collaborating with you.
Don’t impede your business growth. Get your business VAT-registered. In that way, you can open more doors of opportunities to work with other companies and expand your product and service offerings to more people in different places.
5. Reduces Black Market Competitors
The black market, consisting of unregulated businesses, is the biggest competitor of legitimate businesses. They get away with taxes, allowing them to offer consumers lower prices of goods and services. However, both legit companies and consumers suffer.
VAT can help reduce black market competitors because this taxation scheme rewards tax compliance, charging the tax in all production stages. For instance, suppliers and manufacturers must submit the necessary documents to receive credit (incomes tax deductible) for VAT taxes they also pay for procuring raw materials and equipment. Furthermore, they must collect VAT from clients for all their products and services.
A good VAT strategy can help your business comply with tax laws and help acquire more customers. Just ensure you’re doing VAT collection right to avoid problems. If you’re unsure how to get your business VAT-registered, talk to a professional accountant and lawyer. Make your business successful by developing a good VAT strategy, alongside creating a strategic sales and marketing tactic.