We all see on our receipts a VAT element (or are offered a VAT receipt), for example when you fill your vehicle up with fuel; but if you own your own business, just started, or thinking of starting up a new business, do you understand VAT and whether it is applicable to you and your check VAT? Here I have put together a simple guide explaining what you need to know and how to get started.
VAT is a tax that is charged on the majority of goods or services provided in the UK by businesses who are already VAT registered. As well as businesses that provide goods and services in the UK, VAT can apply to some goods and services that are imported from countries outside of the European Union (EU) and brought into the UK. To be able to charge this tax, you have to be VAT registered. VAT registered means that you have told and signed up with HM Revenue & Customs and your business has been given its own VAT registration number. If you are VAT registered, it means that when your business sells either a product or a service you will need to charge your customer VAT at the current applicable rate (see later explanations about the applicable rate), whether your customer is VAT registered or not. If you are a VAT registered business, you are also able to reclaim any VAT charged when your business buys a product or service. Basically if you are VAT registered you charge your customers VAT on the goods or services you provide and you reclaim the VAT that your business pays when you buy any products or services. You have to account for your VAT to HM Revenue & Customs, usually on a quarterly basis, and it is the difference between your the VAT you have charged to your customers and the VAT your business is entitled to reclaim which determines if you have a VAT liability. If you are not VAT registered, then you cannot reclaim any VAT that you pay for any goods or services for your business. There are restrictions and rules that you have to comply with when reclaiming the VAT on your purchases.
How do you know how much VAT to charge your customers? VAT rates are set by the Government and there are currently (at the time of writing) three rates of VAT, the first being the standard rate (currently 17.5%), the second a reduced rate of VAT (currently 5%) and a zero rate of VAT (0). Majority of goods and services are charged at the standard rate of VAT, but there are some exceptions to this and some goods and services where you are allowed to charge either the reduced rate of VAT, such as domestic fuel and power, children’s car seats, installing energy saving materials and sanitary hygiene products or the zero rate of VAT such as certain food products purchased (not eating out), books and newspapers public transport and children’s clothes and shoes. There are also some goods and services which are exempt from VAT or outside the UK VAT system such as insurance, providing credit, membership subscriptions, services from doctors and dentists and some education and training items.
When you are starting out in business or your business is only small, you can choose whether you want to register your business for VAT. You may need to consider any advantages and disadvantages of being VAT registered, such as the increase on your pricing and how this may affect your customers and sales, as well as the amount of VAT your business will be able to reclaim to ensure that it is financially viable. You may also need to consider the additional bookkeeping and accounting procedures which you will need to put in place to ensure that you comply and are able to submit your VAT returns in a timely manner. However, when your business has a turnover in the previous 12 months has gone over a specific limit which is set by the Government called the VAT threshold or you think your turnover will soon go over this limit. Currently (at the time of writing) the VAT threshold is £68,000. Turnover is defined as your revenue or income that a company receives from its normal business activities, usually from the sale of goods and services to customers and in the UK revenue is usually referred to as turnover, so turnover is referring to your sales.
If you decide to register for VAT, or have to register for VAT you will need to apply to HMRC for your unique registration number. Once registered you will have to complete regular VAT returns. When completing your VAT return you need to show the amount of VAT charged on your sales/income which is known as output tax as well as the the VAT you have paid on the business purchases which is known as the input tax. If the amount of your output tax (VAT charged on sales) is higher than your input tax (VAT paid on purchases) then you have to pay over the difference to HMRC. If the amount of your output tax (VAT charged on sales/income) is lower than your input tax (VAT paid on purchases) then you can claim a VAT repayment on your return.
As well as the standard VAT accounting there are also some special VAT accounting schemes which offer a different way to account for VAT that could save your business time and money but these need to be considered carefully.
As you would expect, your business will need to keep all sales invoices and business receipts and show an audit trail of its income as well as all VAT receipts to support all your VAT returns. HMRC can at anytime, decide that they want to look at your supporting records and carry out an inspection in order for them to satisfy that your returns are correct.
VAT rules are quite complex and you may find that for individual cases you may need to seek further advice or clarification.