VAT - Value Added Tax Guide

Value Added Tax (VAT) is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution. Most business-related goods and services will therefore be subject to VAT.

There are several UK VAT rates, the standard rate being 15% (this standard rate was reduced from 17.5% to 15% from 1st December 2008 until 31st December 2009 following the 2008 Pre-Budget Report).

Your company should register for VAT if the value of your taxable supplies in the past 12 months or less has exceeded the current VAT registration threshold of £68,000 (from 1st May 2009 - previously it was £67,000), or the value of your taxable supplies in the next 30 days alone is expected to exceed this threshold.

This threshold applies for the 2009/10 tax year, and usually increases each tax year by £1,000 or so. It is important to remember that turnover is the amount of money going through the business, not just the profit.

Even if your business turnover lies below the current threshold, you can still register for VAT, since there may be business benefits in doing so (worth checking with your accountant or direct with HMRC).

Basically, a business will pay VAT on all purchases it makes (known as ‘input tax’) and then charge VAT on all sales it makes (known as ‘output tax’). If a VAT-registered business receives more output than input tax in a VAT period, it will pay the difference to HMRC, otherwise the HMRC will refund the difference if the business pays more VAT than it receives.

Once you are VAT registered, you will need to update your invoicing templates to take account of the additional tax you need to charge your customers. Most businesses will receive a green VAT return every quarter – you should then send your calculations to HMRC, and pay any VAT owed (or claim a refund). if you file your VAT return online, you will have extra time to pay.

Further VAT information

This article provides a very high level outline of standard business VAT. For more detail, please visit the dedicated HMRC VAT section.

You can also read our guides to the Flat Rate VAT Scheme and VAT Cash Accounting scheme which may benefit your business, and more information on when you should register for VAT.