The UK system of Value-Added Tax (VAT) has much in common with other countries’ GST regimes in that it focuses on taxing goods and services at the point where they are sold to a final purchaser (ie the diner in the restaurant or the person buying a service from a professional). However, the UK system does differ in some important ways, and if your business is growing beyond the initial start up phase then it is inevitable that VAT will appear on your radar. So understanding what VAT is, what it isn’t and what your obligations are might save you some time and headaches down the line.
What is VAT?
VAT is charged when a VAT-registered business sells to either another business or to a non-business customer. When a VAT-registered business buys goods or services they can generally reclaim the VAT they have paid.
When do I need to worry about it?
As a business in the UK, you may have to register for VAT if either:
- your turnover for the previous 12 months has gone over a specific limit – called the ‘VAT threshold’ (currently £85,000)
- you think your turnover will soon go over this limit
Can I register even below the threshold?
You can choose to register for VAT if you want, even if you don’t have to. There are some benefits to registering voluntarily for VAT in that the business may experience a cash flow benefit, as well as giving perceived comfort to your customers (it adds a certain level of prestige and perception of size and professionalism).
From a marketing perspective, by not being VAT registered it may give the impression to prospective clients that you are a small business, and this may put them off from using your services as they may feel that you are too small and not able to fulfil their order due to lack of resources.
Voluntarily registering can also be advantageous if you are selling zero rated items, such as cakes or children’s clothes. You will have no output VAT but will be able to claim input VAT.
When do I need to report my VAT?
If you’re VAT-registered, you’ll have to submit a VAT Return at regular intervals – usually quarterly – and send it to HM Revenue & Customs (HMRC). The return shows:
- the VAT you have charged on your sales to your customers in the period – known as output tax
- the VAT you have paid on your purchases – known as input tax
If the amount of output tax is more than the input tax, then you send the difference to HMRC with your return. If the input tax is more than your output tax, you claim the difference back from HMRC.
How do I know if I need to charge VAT?
If you’re not sure if and when you should charge VAT, there are some basic rules of thumb:
From the date of VAT registration, the company should charge VAT on all supplies within the UK. This must be collected and reported each quarter. Any purchases made or expenses for which the company is charged VAT a VAT receipt should be obtained which will detail the amount of VAT payable and this can be offset against the sales tax. The current standard rate of tax is 20%. Records should be maintained by way of accounting package/excel so that figures each quarter can be reported to HMRC.
Details on VAT for Exports to EU can be found on the HMRC website.
The essential point to remember with VAT is that a few simple steps can ensure that you’re compliant. HMRC is a very focused on VAT fraud, and ignorance of the system and its rules is not a sufficient excuse to escape a penalty. It’s therefore important to make sure you’re recording your VAT status to ensure your VAT return is correct and you don’t pay unnecessary tax.