As a business owner in the UK, it is important to have a clear understanding of Value Added Tax (VAT). This tax is applied to most goods and services sold in the UK, and businesses must ensure that they are registered for VAT if they meet the relevant criteria.
Understanding how VAT works and ensuring that you are complying with the rules can be complex, so it is important to seek professional advice if you are unsure. This guide provides an overview of VAT in the UK and some key considerations for businesses.
What is VAT?
Value Added Tax (VAT) is a consumption tax which is applied to most goods and services sold in the UK. The standard rate of VAT is 20%, although there are reduced rates for some items such as food and children’s clothing.
VAT is charged on the sale of goods and services by businesses which are registered for VAT. Businesses must add VAT to their prices, and this tax is then passed on to HM Revenue & Customs (HMRC) when the business submits their VAT return.
VAT Terms You Should Know
If you are registered for VAT, there are a few key terms that you need to be aware of:
- Input tax: This is the VAT charged on goods and services that you have purchased from suppliers for use in your business.
- Output tax: This is the VAT charged on goods and services that you have sold to customers.
- VAT-exclusive price: This is the price of a good or service before VAT is added.
- VAT-inclusive price: This is the price of a good or service including VAT.
- Standard rate: The standard rate of VAT in the UK is 20%.
- Reduced rate: Some goods and services are eligible for a reduced rate of VAT, which is currently 5%.
- Zero-rated: Some goods and services are exempt from VAT altogether and are therefore known as zero-rated.
Who Needs To Register For VAT?
Businesses in the UK need to register for VAT if their taxable turnover is above a certain threshold. The current thresholds are:
- A taxable turnover of £85,000 or more in any 12-month period
- A taxable turnover of £85,000 or more in the last 12 months, even if this was not in a continuous period
Businesses which are below the VAT registration threshold can choose to register for VAT voluntarily. This may be beneficial if the business expects their turnover to increase in the future, or if they make regular purchases from other businesses which are registered for VAT.
How To Register For VAT?
Businesses can register for VAT online through the HMRC website. The registration process is relatively simple and straightforward, although it is important to ensure that all the required information is provided.
Once a business is registered for VAT, they will be issued with a VAT registration number. This number must be included on all invoices which include VAT.
How is VAT Calculated?
VAT is calculated by adding the tax to the price of goods or services. For example, if a business charges £100 for a product which is subject to 20% VAT, the customer will pay £120 in total (including VAT).
The amount of VAT that a business needs to pay to HMRC depends on the value of their taxable sales and purchases. To calculate this, businesses must complete a VAT return and submit it to HMRC on a quarterly basis.
Businesses can reclaim VAT on eligible purchases, which reduces the amount of tax that they need to pay. For example, if a business spends £1,000 on office supplies which are subject to 20% VAT, they can reclaim £200 from HMRC.
What Are The Different Types Of VAT?
There are two main types of VAT in the UK: Standard Rated VAT and Reduced Rated VAT.
- Standard Rate VAT: Standard Rated VAT is applied to most goods and services at the standard rate of 20%.
- Reduced Rate VAT: Reduced Rated VAT is applied to some items such as food and children’s clothing at a reduced rate of 5%.
Some items are exempt from VAT altogether, such as financial services and insurance. This means that businesses do not need to add VAT to the price of these items.
What Are The Consequences Of Not Complying With VAT Rules?
If a business does not comply with VAT rules, they may be liable for penalties and interest charges. In serious cases, HMRC may also take criminal action against the business or its directors.
It is therefore important to ensure that you are aware of your obligations as a business owner and that you take steps to comply with VAT rules. If you are unsure about anything, you should seek professional advice.
What If I Disagree With HMRC's Decision Over VAT?
If you disagree with a decision made by HMRC over VAT, you have the right to appeal. The appeals process can be complex, so it is important to seek professional advice if you are considering this option.
This guide provides an overview of VAT in the UK and some key considerations for businesses. For more information, please contact us. We can help you to ensure that you are complying with VAT rules and minimise your tax liability.
To know more, get in touch with us today.