Value Added Tax, or VAT, is a general tax placed on almost all goods and services sold. The principle behind VAT is that consumers pay a tax on the products they buy based on the value of the product. VAT rates are percentage based, which means that the greater the price of a product, the more the consumer pays.
In the UK, VAT is administered by HM Revenue and Customs (HMRC). businesses that make taxable supplies of goods or services in the UK must register for VAT. The registration process is relatively simple and can be done online.
Once a business is registered for VAT, it will need to charge VAT on all taxable supplies of goods and services. VAT-registered businesses can also claim back VAT on any goods or services that they have purchased for their business, as long as those goods and services are eligible.
VAT can be a complex tax, but it doesn’t have to be. For small businesses, in particular, there are a number of VAT schemes that can simplify the process and make it easier to comply with the VAT rules.
If you have any questions about VAT, or if you need help registering for VAT, please get in touch with our partners.
When should I register for VAT?
VAT charging is required after your business reaches or is expected to reach the sales threshold of £85,000. Small firms don’t like registering for VAT as they would raise prices or decrease profits if VAT can not be passed on to the customers. As a result, a threshold is implemented so that low-income small enterprises can keep their cash flow and stay competitive. It also helps them keep the cost of compliance low.
Once you are Value Added Tax registered, you must stay VAT registered until you start earning less than £85,000 a year.
How does VAT work?
When a business is VAT registered, it must charge VAT on all taxable supplies of goods and services. This means that the business must include VAT in the price of any products or services that it sells, and it must also submit VAT returns to HMRC.
Businesses can also claim back VAT on any goods or services purchased for their business, as long as those goods and services are eligible. This is called VAT recovery.
VAT can be a complex tax, but it doesn’t have to be. For small businesses, in particular, there are a number of VAT schemes that can simplify the process and make it easier to comply with the VAT rules.
How much VAT should I charge?
In the UK, Value Added Tax is charged at a rate of 20%. This means that for every pound you sell something for, you must add 20p in VAT. There are some exceptions to this rule, however. If you’re selling food or children’s clothing, for example, you can charge a reduced VAT rate of 5%. VAT is also not charged on some items, such as newspapers and books.
There is also another rate at which VAT is charged at 0%. You charge no VAT on sales for these items. They are considered to be essentials and include many types of food, children’s clothing, bookings, medical supplies and equipment.
You must record all of these rates on your VAT return — even zero-rate products. The only goods and services that you do not need to record for VAT purposes are those exempt from VAT. These include items like medical services, finance and credit, and fundraisers operated by charities.
When do I need to submit VAT returns?
As a VAT-registered business, you must submit VAT returns to HMRC on a regular basis. The frequency of VAT returns depends on your VAT scheme.
If you’re on the standard VAT scheme, you must submit VAT returns quarterly. This means that you’ll need to file a return every 3 months, with payments due 1 month and 7 days after the end of each quarter. For example, if your quarter ends on 31 March, your VAT return will be due by 7 May and payment will be due by 7 June.
If you’re on the flat rate VAT scheme, you must submit VAT returns monthly or quarterly. This means that you can choose to file a return every month or every 3 months, with payments due 1 month and 7 days after the end of each period.
If you’re on the annual accounting VAT scheme, you must submit VAT returns annually. This means that you’ll need to file a return once a year, with payments due 10 months and 7 days after the end of your VAT year. For example, if your VAT year ends on 31 March, your VAT return will be due by 7 December and payment will be due by 7 January.
VAT can be a complex tax, but it doesn’t have to be. For small businesses, in particular, there are a number of VAT schemes that can simplify the process and make it easier to comply with the VAT rules.
If you’re thinking of registering for VAT, make sure you understand the different VAT rates and how they apply to your business. And remember, once you’re VAT registered, you must submit VAT returns to HMRC on a regular basis. Failure to do so can result in penalties and interest charges.
But as long as you keep on top of your VAT obligations, you can focus on running your business and growing your bottom line. And that’s something we can all VAT for!
