What is VAT? VAT, or very awkward tax as I like to call it, confuses and scares many business owners. Fear not! Here is a great guide to what VAT is, how it affects your business, and how the VAT system works. One thing to remember is that when you become VAT registered that is a sign of success and business growth. Value Added Tax principles are straightforward, the application and rules not always so.
More about Value Added Tax:
- It is tax that is administered and collected by VAT registered businesses
- The tax is actually paid by consumers and businesses not registered
- It is charged on most goods and services.
The role and responsibilities of your business
When your sales get to a certain level (currently £85,000 over a 12-month period) you must register for VAT. There may be good reasons to voluntarily register for VAT, crazy but true. Reasons include: it enhances the perception of the business (gives a bigger profile,) you can claim input VAT and if zero rated supplies. Drawbacks include: it increases admin work (you need to complete and submit a return) and you need to start charging VAT to customers. This could result in customers moving elsewhere due to increased prices, hence potentially lower profits.
Once you become registered for Value Added Tax you join the millions of unpaid tax collectors employed by the government in the UK and around the world. The only difference is that you get no benefits, pay, training, sick pay and you can only quit when you are no longer registered. There is no bonus or praise for doing a good job, but mess up, innocently or otherwise, and it can cost you.
If you do not comply with these responsibilities, then it’s likely you will be relegated to HMRC’s naughty step. Above all, fines and penalties are likely to follow. No one wants that.
To stop yourself getting in a pickle, store away a percentage of what you owe for VAT in a separate bank account. Start with £100 for every £1,000 of sales, adjust once you have a better idea of what’s going on. Once you become registered you must charge VAT on your goods and services. If you are exporting outside the UK, VAT is charged at a rate 0%, but it is charged on goods purchased from outside the UK and European Union at the full rate of 20%.
VAT is not charged on all goods and services. Goods and services are broken down into three main categories:
- Exempt supply, which includes insurance, postal services & financial services
- Outside the scope of VAT, which includes wages, dividends, and taxes
- Taxable supply, which is further broken down into two groups, zero-rated, which includes children’s, newspapers, most food products, and books.
Standard rated supply – Is deemed to be everything else other than that mentioned above. This is what VAT is charged on, the full standard rate is currently 20%.
Responsibilities
Your business will add this to what you charge your customers (output VAT), you in turn will be paying this on goods and services you buy (input VAT).
VAT-registered businesses must complete and submit a VAT return to HMRC, typically every 3 months. This is because the return shows the VAT you have charged your customers, collected, and what is due/refundable.
From 1 April 2019, VAT-registered businesses over the registration threshold must comply with Making Tax Digital.
