Value Added Tax is a levy added onto most transactions of goods and services in the UK. It is a consumption tax collected at every stage of production and distribution, charged only by VAT-registered companies.
How Does VAT Work?
Qualifying businesses in the UK will pay VAT on their purchases (the input tax) and then charge the same rate to their customers (the output tax).
When more money is raised paying the output tax than is received from the input tax, the business must pay this excess to the government. If the difference is negative, this amount can be claimed back from the HMRC.
What is the Current Rate of VAT?
The standard rate of VAT is currently set at 20%. This will apply for the majority of goods and services you’re likely to buy and sell.
As well as the standard rate, there are two further rates of VAT for certain items. These are:
- The Reduced Rate – applicable on purchases such as mobility scooters for the elderly, nicotine patches, home energy bills and energy-saving materials.
- The Zero Rate – applicable on purchases such as children’s clothes, newspapers, charity sales, equipment for the blind and water supplied to domestic households.
A full list of the VAT rates for different goods and services can be found here.
Who Needs to Pay VAT?
Registering for VAT is compulsory for businesses whose value of taxable supplies is greater than £83,000 over a 12-month period. This applies to turnover and not just profit.
Business should also register for VAT if they’re expecting to go over this threshold in the next 30 days.
Registering for VAT can actually be done voluntarily, even for companies whose taxable supplies are less than £83,000. To what extent this is desirable depends on the nature of your business, although it can give off a more professional and dependable impression.
As a VAT-registered business, you must add the correct amount of tax onto the goods and services you supply. There’s then the responsibility of submitting your VAT tax return online every three months.
You should seek professional advice if unsure of registering as a VAT business. An accountant can check all your tax affairs are in order and help you avoid unnecessary errors, which would incur fines or penalties. Likewise, they can advise on the VAT flat rate scheme which may suit your business requirements better.
If you found this guide interesting, you may also enjoy reading Learning More About HMRC Penalties for Businesses and Why You Shouldn’t Try Do it Yourself Accounting.
Contact us for help and advise on whether your business should register for VAT.