As a business owner, you must decide if you want to register your company for VAT. This is compulsory for companies with a taxable turnover of £83,000 or higher, although you can still register voluntarily if your turnover is less than this amount.
When you are VAT registered this means VAT has to be added onto the goods and services you provide, known as ‘taxable supplies’. You can then also claim VAT back on the purchases you make in relation to the business.
Accurate records throughout the year, and in some cases legal advice, are thus required so you don’t fall foul of the HMRC and incur costly penalties.
The HMRC will recognise you as a VAT-registered company on the date you’re required to register and not the date when the process is complete. This start date is when you should start adding VAT onto your products.
A business that expects to make sales of over £83,000 during the next 30 days must also register for VAT, even if they’re not at the figure presently. Late notification of this will result in fines, on top of paying back the outstanding VAT.
As noted previously, smaller companies not at this level of turnover can still register. There’s potential tax benefits for doing so whilst it’ll also present a more professional image to customers and competitors alike.
You can only charge VAT once you’re VAT-registered and have your registration certificate/VAT number. This charge must be for business-related matters only, which include the following items:
- Business sales
- Asset sales
- Loaning goods or services
- Charging commission
There are various rates of VAT you have to charge, although the Standard Rate used for most goods and services is set at 20%.
The Reduced Rate of 5% includes items such as mobility aids for the elderly, children’s car seats and many energy-saving materials. The Zero Rate and Exempt brackets cover items such as charitable donations, welfare for disabled people and numerous health services.
For a full list of the VAT rates on goods and services, the official government website contains all the relevant information.
There are also various schemes to consider (the cash accounting, standard and flat rate schemes for example) that will suit different types of companies.
Reclaiming VAT is not compulsory but can be achieved on various purchases related to your business. A VAT invoice must be held to do this.
Claiming on fuel for business trips and employee expenses are two common examples of reclaiming VAT. Remember that if you invest in exempt items such as training programmes or insurance, you won’t be able to retrieve these costs.
Cases should be assessed individually when it comes to reclaiming, depending on the industry and its regulations. For complicated issues, it makes sense to hire the expertise of a professional accountant to maximise tax efficiency.
If you’d like more information on VAT, check out our Introduction to VAT. You can also find out more about HMRC Penalties for Businesses.