Businesses with a Value Added Tax (VAT) taxable turnover exceeding £90,000 are required to register for VAT, however, businesses with lower turnover can also opt-in.
An Overview of VAT in the UK
VAT is added to the majority of services and products sold in the UK by VAT-registered businesses. The standard VAT rate is 20%, which applies to most services and goods. A reduced 5% VAT rate applies to some services and goods, such as home energy services, mobility aids for over-60s, and children’s car seats. There are also a number of services and goods to which the 0% rate of VAT applies, including children’s clothing and most food items.
How To Add VAT
There are rules for charging VAT that you will need to refer to in order to ensure you are fully VAT-compliant.
Standard Rate
Let’s imagine that you are selling a product to which the standard 20% VAT rate applies. You want to sell a table for £100. To add 20% VAT, simply multiply the £100 by 1.2. The price for the table, including VAT, is £120.
Reduced Rate
If you are selling a child’s car seat for £100, you’ll need to add the reduced rate of 5% VAT to the price. To do this, all you need to do is multiply the £100 by 1.05. The price for the car seat, including VAT, is £105.
Discounts and VAT
If you’re offering a basic discount, such as 10% off, you can simply charge the appropriate level of VAT on the reduced price. So, if you’re selling the table from the previous example at 10% off, you’ll need to multiply £90 by 1.2 to arrive at the price, including VAT of £108.
Now, let’s say you’re running a multi-buy offer where customers can buy three items for £15. If all items in the offer fall under the standard rate of VAT, you can simply charge at the combined price. However, if items in the offer are subject to different rates of VAT, you’ll need to use the ‘apportionment’ method.
This method is slightly more complex, so you may prefer to seek support from professional tax services, such as those provided by AK Tax.
Recent Changes to VAT Penalties and Interest Payments
From 7 March 2023, HM Revenue & Customs introduced a new penalty system for businesses submitting or paying VAT returns after the deadline. This new system is designed to be more proportionate and fairer, operating on a points-based system so that occasional, genuine errors are not punished unnecessarily.
Businesses will incur a penalty for:
Late Submissions
One penalty point will be applied for every VAT return that is submitted late. When customers reach a certain penalty point threshold, a £200 fine will be served. For every subsequent return submitted late, an additional £200 fine will be awarded.
Late Payments
For all payments that are made more than 15 days beyond the payment deadline, businesses will be required to pay a late payment penalty calculated at 2% of the total VAT owed. As well as receiving an increased first late payment penalty, businesses that have outstanding VAT payments for more than 30 days will also receive a second financial penalty, charged at 4% of the outstanding balance.
How to Keep Accurate VAT Records
As HMRC may ask you to provide evidence to support that you are paying the correct amount of tax, it is vital to maintain accurate and detailed records. As a VAT-registered business, you need to record:
- Everything you sell and buy, including details of items that are exempt from
- VAT Copies of every invoice sent and received
- Credit or debit notes
- Self-billing agreements
- Goods taken for your own use or given away
This is in addition to general records, including till rolls, cash books, and bank statements.
Avoiding Common VAT Compliance Pitfalls
There are a number of relatively common mistakes that are surprisingly easy to avoid with a bit of research or support from an expert. Some of these pitfalls include:
Failing to Register for VAT
You need to register your business for VAT within 30 days of exceeding the £90,000 turnover limit. To avoid being hit with a potentially costly penalty, make sure you are tracking your monthly income and seek professional advice as soon as you are starting to near that £90,000 figure.
Failing to Provide a Valid Invoice
It is only possible to claim VAT with a supporting invoice. The invoice should be made out to the name of the business, not the director, in order for it to be valid.
