Value Added Tax or VAT as it’s better known is a tax added to the value most goods and services. VAT is one of the most complicated areas of tax and no one article or guide is enough to cover the rules governing it’s application. We try to cover as much of the basics in this article that all business owners should know.
If your business is registered for VAT, then you have to charge your customers VAT on all your taxable sales. You can also claim back (in most cases) any VAT charged to you by your suppliers.
Whether or not you need to register your business for VAT depends on its turnover from VATable sales. If your businesses VATable turnover exceeds the registration threshold in any rolling 12 month period or you expect it to exceed the threshold in the next 30 days you must register for VAT. This is known as compulsory registration.
The current VAT registration threshold is £85,000.
You can register for VAT even if your turnover is below the registration threshold. However you must be making some supplies of VATable goods or services. So if your sales are entirely made up of VAT exempt sales; you will not be able to register voluntarily.
Whether you should or should not register for VAT voluntarily depends on your individual circumstances. Below are some examples where you may want to do so:
Most sales of goods or services made in the UK are VATable. However there are some sales that are exempt from VAT. These sales would not count towards your VATable turnover for the purposes of determining whether you need to register for VAT.
Other sales are completely outside the scope of VAT. Meaning that they do not factor in to any VAT considerations at all.
Examples of Exempt and Outside the Scope sales are shown below, this list is not exhaustive.
To make things even more complicated sales of VATable goods or services do not all carry same amount of VAT. Depending on the goods being sold or the services being provided the VAT you charge will be different. Most goods and services are ‘standard rated’ and carry the 20% rate of VAT. Others are either ‘reduced rated’ and carry a VAT rate of 5% or ‘zero rated’ and carry a VAT rate of 0%.
Examples of some of the goods and services that carry the reduced and zero rates are shown below, again, this list is not exhaustive.
You might be wondering what’s the point of having zero rate of VAT? Even though no VAT is paid on these items they are still VATable. This means that they still count towards your VATable turnover for registration purposes. I.e. if you breach the registration threshold by making only zero rated sales you still need to register for VAT.
If you are making only zero rated sales then registering for VAT voluntarily is a no brainer. You will charge VAT at 0% on your sales but will still be able to reclaim any VAT on purchases and expenses. Remember that if you make only exempt supplies then you cannot register for VAT. This key distinction is important to know.
VAT registered businesses must complete VAT returns normally on a quarterly basis. When registering for VAT you can choose to complete VAT returns monthly or annually.
A VAT return shows the total of Output VAT (VAT payable on sales) and Input VAT (VAT reclaimed on purchases and expenses); the difference of which is what needs to be paid to HMRC. Returns must be filed and any VAT due paid to HMRC within one calendar month and 7 days of the end of the relevant quarter. So for example if your VAT quarter ends 31 July you have until 7 September to file and pay.
Records must be kept showing how the figures submitted have been arrived at. This includes but is not limited to sales invoices, expense receipts and associated workings.
Making Tax Digital or MTD is a set of rules that have been introduced by HMRC for all VAT registered businesses that govern how business records are kept and VAT returns are filed. All business that are not exempt from the rules must keep digital records of all supporting evidence for a VAT return. The return must also be filed using HMRC approved software.
VAT is a minefield, with even many accountants offering only basic VAT services. This guide is by no means sufficient to understand the VAT rules applicable to most businesses. However we hope that it provides a starting point. We will be posting many more articles and guides in relation to VAT soon.
