Value Added Tax (VAT)

Value Added Tax is a corporate tax that businesses are required to charge on their goods and services when their turnover exceeds a certain limit. Like all taxes in the UK, VAT is administered by HM Revenue and Customs (HMRC). Currently, the threshold for compulsory VAT registration is set at £82,000 of taxable turnover within a 12-month period, but it is possible, and often beneficial for some smaller businesses to register voluntarily for VAT even if their sales are below the threshold. This enables them to reclaim VAT paid on any goods and services they have purchased from other VAT registered businesses, which can often be more than the VAT they have received from the sale of their own goods or services.

VAT rates

There are three rates of VAT:

  1. Zero-rate (0%) on items such as food, books and newspapers, and children’s clothing.
  2. Reduced-rate (5%) on services such as domestic power supplies.
  3. Standard rate of 20%, which applies to the majority of commercial goods and services.

The appropriate VAT should be added to the normal sale price of the goods or services on offer.

Submitting VAT Returns

If your business is registered for VAT, you will have to submit an online VAT Return to HMRC every 3 months, even if you have no VAT to pay or reclaim. These quarterly intervals are known as VAT accounting periods. You must send your VAT Return to HMRC within 1 month and 7 days after the end of each quarterly accounting period. The deadline for paying any VAT you owe will usually fall on the same date.

VAT Returns should be submitted to HMRC through your VAT online account or accounting software. Your VAT Return for each accounting period should include information about:

  • Total sales and purchases.
  • How much VAT you owe.
  • How much VAT you can reclaim, if any.
  • The amount of VAT you can reclaim from HMRC, if any.

The tax you charge to your customers for the goods or services they buy from your business is known as ‘output tax’. The tax you pay to other VAT registered businesses on the goods or services you buy from them is known as ‘input tax’.

If the output tax during an accounting period is more than the input tax, you will have to pay the difference to HMRC when you submit your quarterly return. Conversely, if the input tax during an accounting period is more than the output tax, you will be able to reclaim the difference from HMRC.

Paying VAT to HMRC

If you need to pay VAT to HMRC, you must make the payments electronically within 1 month and 7 days after the end of each VAT accounting period. Most businesses do this by Direct Debit because it is the most convenient method. Alternative methods of payment include:

  • Online or telephone banking (Faster Payments)
  • Bacs
  • Standing order
  • Online by debit or credit card
  • At your bank of building society

If you do not plan to pay by Direct Debit, please make sure you leave enough time for the payment to reach HMRC by the deadline and take into account weekends and bank holidays, otherwise you may have to pay a surcharge if it is late.

VAT exempt goods and services

If everything your business sells is exempt from VAT, you cannot charge VAT to your customers or service users. VAT exempt goods and services include:

  • Physical education and sports activities.
  • Betting and gaming.
  • Bingo.
  • Lottery tickets and online lottery games.
  • Admission charges to museums, art exhibitions, zoos and performances.
  • Antiques, works of art or similar used to settle a tax or estate duty debt with HMRC.
  • Admission charges by charities.
  • Charitable fundraising events and sponsored charitable events.
  • Burial or cremation services for humans.
  • Funeral plans written under contracts of insurance.
  • Care or medical treatments provided by hospitals, hospices or nursing homes.
  • Health services provided by doctors, dentists, opticians, pharmacists and other health professionals.
  • Educational services provided by schools, universities and colleges.
  • Garages or parking spaces let together with dwellings for permanent residential use.
  • Parking.
  • Property, land and buildings.
  • Houseboat moorings.
  • Parking spaces or garages supplied with houseboat moorings.
  • Public postal services.
  • Financial services, investments and insurance.

You must, however, keep a record of such transactions in your business accounts.

VAT record keeping

It is essential that you keep accurate, complete and readable VAT records of your sales and purchases, issue correct VAT invoices to your customers and keep a separate summary of all input and output VAT in a VAT Account for a minimum of 6 years. These records can be paper, electronic or as part a software program. The VAT you charge on your sales must be recorded separately from the VAT you pay on business-related purchases.

VAT records

In order to maintain your VAT Account, you must keep:

  • Copies of all invoices issued by your business.
  • Originals of all invoices received by your business.
  • Self-billing agreements prepared by customers.
  • Name, address and VAT number of any self-billing suppliers.
  • Import and export records.
  • Debit or credit notes.
  • Records of items on which you cannot reclaim VAT.
  • Records of goods given away or taken from stock for private use.
  • Records of zero-rated, reduced or exempt items bought or sold.

VAT invoices

VAT invoices should be issued with all sales, either on paper or in electronic format. You must keep copies of all sales invoices (even if they are cancelled or issued by mistake), as well as purchase invoices for anything your business buys. However, there is no need to issue a VAT invoice in the following circumstances:

  • Zero-rated or exempt sales within the UK.
  • Goods are given as a gift.
  • Goods are sold under a VAT second-hand margin scheme.
  • Your customers operate a self-billing agreement.

If you are a retailer, there is no legal requirement to issue VAT invoices to your customers unless they make a specific request.

VAT Account

The figures in your VAT Account will be used to complete your VAT Returns. There is no strict format for the way your VAT Account should look, as long as it shows the following:

  • Total VAT sales (output tax).
  • Total VAT purchases (input tax).
  • VAT owed to HMRC.
  • VAT you can reclaim from HMRC.
  • If your business uses the VAT Flat Rate Scheme, the flat rate percentage and turnover it applies to.
  • VAT on EU purchases and sales.
  • VAT owed or are due following a correction.
  • Details of any errors and corrections in your VAT Return.

Registering a company for VAT

To charge VAT to your customers and reclaim VAT on any business-related purchases you make, you will have to register your business for VAT through HMRC and create an online Government Gateway account. This applies whether you operate as a sole trader, a limited company or a partnership, but remember: you cannot register for VAT if everything you sell is VAT-exempt.

You can register your business and deal with your VAT affairs yourself, or you can appoint an accountant or tax agent to take care of this on your behalf.

When is VAT registration legally required?

VAT registration is compulsory in the following circumstances:

  • Your VAT taxable turnover is greater than the current threshold (£82,000 2015-16) in a rolling 12-month period.
  • You expect to go over the threshold within a 30-day period.
  • You receive goods in the UK from the EU worth greater than the threshold.
  • You take over an existing business that is VAT registered.

VAT registration must take place within 30 days of exceeding the threshold, otherwise you may have to pay a penalty and interest to HMRC. If you exceed the threshold temporarily and you are unlikely to do so again, you can ask HMRC to make an exception.

The VAT registration form will ask you to provide the following information:

  • Name of your business.
  • Date your business was set up.
  • Country of registration.
  • Business contact details.
  • Business activities.
  • Business bank account details.
  • Details about your turnover.
  • Applicant details.

Within approximately 14 days of submitting your application, HMRC will send a VAT registration certificate to your business contact address or registered office. This will state your VAT number, the deadline for making your first VAT Return and payment, and your ‘effective date of registration’. Your registration date will be either the date your turnover exceeded the threshold, or the date you asked to voluntarily register your business.

Starting from the effective date of registration, you must:

  • Charge the appropriate VAT rate on your goods or services.
  • Issue VAT invoices.
  • Keep VAT records.
  • Submit online VAT Returns to HMRC at the end of each accounting period.
  • Pay any VAT due to HMRC at the end of each accounting period.
  • Maintain a VAT account.

You can also start to reclaim the VAT you've paid on certain business-related purchases - these claims can be backdated up to 4 years for goods and 6 months for services.

Voluntary registration

Whilst VAT registration is legally required by any business with a turnover that exceeds the threshold, smaller businesses with turnover below the threshold have the option to register for VAT voluntary. In some cases it may be more hassle than it’s worth. For many businesses, however, there are a number of significant benefits to doing so, particularly if the majority of their goods and services are purchased from VAT-registered businesses. Without being VAT registered, you cannot claim back any VAT your business has incurred.

Improve your corporate Image
If your business is VAT registered, you can display your VAT number and people will automatically assume your turnover is above £82,000 per year. This will give the illusion that your business is bigger and more lucrative than it really is, which may help you to attract bigger clients and more valuable contracts. If your business is not VAT-registered, everyone will know that you’re bringing in less than £82,000 per year.

Reclaim VAT on purchases
If you purchase goods and services from the VAT-registered businesses for things like materials and equipment, energy supplies, and other business overheads and expenses, you could benefit greatly from being VAT registered because you may be in a refund position with HMRC if your input tax on purchases is higher than the output tax obtained from sales. These refunds can be backdated for up to 4 years if you have the necessary paperwork to support your claim. If you’re not VAT-registered, you cannot reclaim any VAT that you have paid on business costs and expenses.

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