 Value Added Tax (VAT) is a tax that applies to most business transactions involving the transfer of goods or services.
Once the turnover of a business reaches a certain threshold level, that business has to register for Value Added Tax (VAT). In essence, this means that whenever this business buys or sells anything or trades in the course of daily business, it has to pay Value Added Tax (VAT) to HM Revenue & Customs (HMRC).
Some businesses choose to voluntarily register for Value Added Tax (VAT) even if their turnover is below the registration threshold.
Businesses pay VAT on its purchases. This is called input tax. They also charge VAT on their sales and this is called output tax. If a VAT-registered business receives more output tax from sales than it pays in input tax on purchases, it must pay the difference to HMRC. If more input tax has been paid than output tax charged, the HMRC will refund the difference to the business. It is important to note that Value Added Tax is basically "a tax on end consumers" and hence is not a cost to the business but rather to the end consumer.
It is compulsory for a business to register for VAT if taxable goods and services provided in the last 12 month period exceed £60,000, or if you anticipate providing taxable goods and services amounting to more than £60,000 in the next 30-day period.
To find out if you need to register for Value Added Tax, Business Link provides an Interactive tool. This is available by clicking here*
There are certain types of goods and services which are not taxable and are therefore exempt from VAT, for example, insurance, loans, postal services or some types of education or training. If your business supplies only goods and services that are exempt, then you can't register and claim the VAT back on your purchases.
Businesses with a turnover below the registration threshold can also register for VAT voluntarily. If you are considering voluntary registration you should seek advice from your accountant. There are certain advantages and disadvantages of voluntary registration for VAT
- Ability to reclaim some of your input tax.
- Increased credibility for your business - some businesses prefer dealing with suppliers with a VAT number.
- If your supplies are to other VAT-registered businesses then they can reclaim the VAT charged.
- You will also need to start keeping VAT records, which will mean a lot more paperwork and fill in a regular VAT return with details of your sales and purchases.
- If your supplies are to the public or non-VAT registered businesses then they can not reclaim the VAT charged.
- Starting from your date of VAT registration you will need to issue VAT invoices.
- You will need to keep a record of the amount of VAT you charge in your records. This is your output tax.
If you register for VAT, there are some changes you will need to make in the day-to-day running of your business.
For your sales:
- Starting from your date of VAT registration you will need to issue VAT invoices.
- You will need to keep a record of the amount of VAT you charge in your records. This is your output tax.
- You must have a VAT invoice for all your purchases to be able to reclaim any VAT paid.
- You will need to keep a record of the amount of VAT you have paid in a separate column in your records. This is your input tax
For your purchases:
- You must have a VAT invoice for all your purchases to be able to reclaim any VAT paid.
- You will need to keep a record of the amount of VAT you have paid in a separate column in your records. This is your input tax
There are three rates of VAT :
Certain goods and services are classed as exempt and no VAT is charged to the customer. Find out when your goods and services are exempt from VAT on the HMRC website .
The crucial difference between goods and services that are zero-rated and those that are exempt is that if your business supplies only goods and services that are exempt, then you can't register and claim the VAT back on your purchases.
Businesses usually account for VAT on a quarterly basis . When you register you will be assigned a tax period and HMRC will automatically send you a VAT return to coincide with the end of this period.
Alternatively, you can submit your return via the HMRC website and arrange for an electronic payment. If you enrol for this service, you will continue to receive a paper return (as a reminder) before your electronic return is due.
Your VAT return is used to detail the amount payable and how you have calculated it.
Your completed VAT return and any tax owed to HMRC is normally due one month after the end of your tax period.
You can download the main guide to VAT from the HM Revenue & Customs website (PDF) by clicking here.
To find out more about , please call us at +44 (0)1223 507080 or email at info@tax.uk.com
*Note: This tool should be used for the purpose of guidance only and further professional advice should be obtained from your Account Manager before acting on any information contained herein. Andrew Webster Limited will not accept any responsibility for loss caused to any person(s) whatsoever as a result of action taken or refrained from based on the content of this note.
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