VAT – Getting Started

VAT – Getting Started

VAT is an often misunderstood tax and clients often ask questions about it. Hopefully this post will dispel some of the myths and make clear how it works.

What is VAT?

VAT is Value Added Tax. It is a tax that’s charged on most goods and services that registered businesses provide in the UK.

For the purposes of this post we won’t explore the complexities when trading outside of the UK but we are happy to advise on this if you use the Contact Us link.

Who charges VAT?

VAT can only be charged by a registered business. A registered business is an individual, a partnership, a company, club, association or charity.

If your turnover is below the threshold then you do not have to register but you can voluntarily decide to register if it is to the benefit of your business. Once your turnover is over the threshold (currently £85,000 per year) you must register.

How much is VAT?

There are three rates:

  • standard – 20%
  • reduced – 5%
  • zero – 0%

Goods and services charged at a standard, reduced or zero rate are ‘taxable supplies’. Even though a zero rated item doesn’t have VAT charged on it it is still a taxable supply at a rate of zero.

Most goods are standard rates. The reduced rate applies to children’s car seats, domestic supplies of fuel and power and products to help with quitting smoking.

A zero rate is applied to most basic food items, books and magazines, children’s clothing and shoes, and travel by public transport.

Rates on different goods and services – GOV.UK
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You charge your customers at the correct rate for the goods or services you provide. There are some goods and services where you cannot charge VAT. These may be exempt or outside the scope. These are not ‘taxable supplies’. These include items such as insurance, bank charges and postage stamps.

How does VAT work?

The VAT you charge your customers on your sales is your ‘output tax’.

The VAT you have paid on your purchases and expenses to make your taxable supplies is your ‘input tax’.

Take away your input tax from your output tax. You then either send a payment to HMRC or claim a repayment from HMRC.

For example

Output tax £1,500 – Input tax £1,000 – Pay £500 to HMRC

Output tax £1,000 – Input tax £1,500 – Claim £500 from HMRC

To help you remember which is output and input tax consider how the goods are moving. Sales go out of your business and purchases come into your business. Therefore sales incur output tax and purchases incur input tax.

What is my taxable turnover?

VAT taxable turnover is the total value of everything you sell that isn’t exempt from or outside the scope of VAT.

If all of your goods and services are exempt, you will not be allowed to register.

Calculate taxable turnover – GOV.UK
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When must you register?

You will need to register if, at the end of a calendar month, your taxable turnover has gone over the registration threshold during the previous 12 months or less.

You should also register if you expect your taxable turnover, in the next 30 days alone, to go over the registration threshold.

Register within 30 days of going over or expecting to go over the threshold. If you don’t register on time, you’ll still need to pay the VAT due from when you should have registered. HMRC may also charge you a penalty. Don’t let this happen to you, it’s a waste of your money.

Every registered business has to charge their customers VAT, at the correct rate, for the goods and services they supply.

Remember, when you are registered, you can claim back the VAT you have paid to make your taxable supplies.

When to register – GOV.UK
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How do I register?

The quickest and easiest way to register is to use HMRC’s online services here.

After you register, HMRC will send you your registration certificate and details of when your (usually quarterly) returns are due.

Some businesses may need to cancel their registration for a variety of reasons. This is beyond the scope of this post but we are happy to advise. Please Contact Us for more information.

What are exempt supplies?

No VAT is charged on exempt items. Don’t include sales of exempt goods or services when you are working out if you need to register for VAT. They do not form part of your taxable turnover.

Once you register, you must keep a record of all the exempt items you sell and include these in your VAT return.

Remember, if your business only provides exempt goods or services, you will not be allowed to register.

Some examples of exempt supplies are:

  • financial and insurance services
  • betting, gaming and lotteries
  • most services of doctors and dentists

Exempt supplies and zero-rated supplies are very different.

Zero-rated goods are taxable supplies and are included in your ‘taxable turnover’. You can claim back VAT you have paid to provide zero-rated goods and services.
Exempt goods are not taxable supplies and are not included in your ‘taxable turnover’. You can’t usually claim back VAT you have paid to provide exempt goods and services.

VAT Invoicing

Once you are registered, when you make a sale you must give your customer a VAT invoice. Included in this invoice must be your VAT registration number, a tax date, a description of the goods or services supplied and the amounts net, tax and gross (i.e. before tax and after tax).If your customer is registered they need this document to be able to reclaim the VAT you’ve charged them.

Keeping Records

All registered businesses must by law keep their records for a minimum of 6 years. HMRC may wish to see these documents at any time. Electronic records are now acceptable so paper copies do not need to be kept. However they must be accessible in the event of an HMRC inspection.

Further Reading

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UK Value Added Tax can be a minefield but using a professional accountant or bookkeeper can take away the headache and ensure that you comply with HMRC’s regulations. Penalties for non-compliance are severe.

Please contact us if you need more information.

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