Whether you’re planning to start a business or your business is growing rapidly, it’s important to know about your VAT obligations. In this guide, we’ll cover everything you need to know about VAT to get you started.
What Is VAT?
VAT stands for Value Added Tax, and it’s one of the many taxes that businesses and self-employed individuals in the UK need to know about.
This is a tax that is added to most goods and services that your business sells. But it’s not a tax that you pay – instead, your customers pay it, and you have the responsibility of collecting it and paying it to HMRC.
Not every business needs to register for VAT, and not all products and services have VAT added onto them. There are also different VAT rates, which we’ll look at next.
VAT Rates
While most products and services will need to have VAT added to them, some products and services are exempt from VAT.
These are called VAT-exempt products and services, and they include most food and drink, books, children’s clothing and other items that are considered essential. Where VAT is added to products and services, there are two rates:
- The Standard Rate of 20% (this covers the majority of goods)
- The Reduced Rate of 5%
This is the rate you will have to add to your products and services when you sell them to customers. If you sell a product where the Standard Rate applies, you will add VAT of 20%. Therefore, if the item costs £100, you would charge your customers £120. If the Reduced Rate applies, you would only charge £105.
Who Has to Pay It?
Whether your business has to pay VAT or not depends on your turnover. If your turnover is more than the VAT threshold of £85,000, you must register. This turnover covers any 12-month period, not just the tax year.
If you expect to earn over the threshold in the coming 30 days, you will also have to register for VAT. You can get started by calculating your turnover using the information on the Gov.uk website.
Keep in mind that if your turnover goes over the threshold only temporarily, you may be able to apply for an exception. This involves writing to HMRC and presenting evidence that your turnover will not go above the threshold in the next year.
Registering for VAT
You do not have to go over the threshold in order to register. If you want to register even if you don’t have to, you can still do so.
Some businesses may choose to do this for various reasons. For example, it may help the business look more credible and attract better clients.
Because you can also reclaim the VAT (more on this later), you may end up paying more in VAT than you collect from your customers – which can work out well for your business.
Paying VAT
With all the other challenges of running a business, like managing cash flow and payroll, sorting out VAT is another task that needs to be done once you have registered.
The most important task will be keeping VAT records, including all the VAT you have charged your customers, and all the VAT you have paid for business purposes (e.g. equipment).
But you don’t send the VAT to HMRC for every transaction. Instead, you submit a VAT return for every tax quarter or for the year. This shows how much you have collected from customers who bought your products and services (output tax) and how much you have paid (input tax), and it determines how much VAT you have to pay in total.
This may lead to paying VAT if you collect more VAT than you pay to suppliers. However, if you end up paying more VAT to suppliers than you collect from your customers, you can reclaim the money. This is called a VAT refund, and it is different from claiming business expenses.
Be aware that you can only claim back VAT for business purposes, and it gets trickier where items you have purchased are also used for private use, like a phone. You will also need a VAT receipt in order to reclaim any VAT you have paid.
Updates: VAT and Coronavirus
Be aware that VAT rules can change. For example, due to the COVID-19 pandemic, the VAT rules were changed by Chancellor Rishi Sunak. As a result, starting on Wednesday 15th July 2020, the Standard Rate has been changed to the Reduced Rate for certain foods, attractions and accommodation.
Keep a close eye on developments because they may affect your business over the coming weeks and months.
Need Help with Your VAT?
At AK Tax & Accountancy, we can assist with all of your VAT accounting requirements, from providing you with advice to helping you pay and claim back VAT. We keep track of all the latest developments so you never end up paying more or less than you should, ensuring you stay compliant. Contact us today and speak with one of our experienced accountants to find out more.
