This second guide in ByteStart’s 3-Part VATChat series; outlines how VAT registered businesses should charge VAT on their goods and services, and how to reclaim VAT on purchases and costs.
‘Outputs’ means sales or income. Output tax is VAT charged on your sales.
The standard VAT rate is currently 20%. And this applies to most sales of goods and services. However, there are a range of supplies that are subject to VAT rates of 5% and 0% respectively.
Environmentally-friendly works to domestic properties, gas and electricity bills, and children’s car seats, are amongst those items falling within the reduced VAT rate (5%).
New houses, newspapers and books, and some food, are zero rated (0%). You should check to see whether your activities fall within these categories. If so, then there is some goods news:
- You can still claim VAT on your expenses, whether direct costs, or overheads: and
- Your VAT Returns may be repayment, ie: money will be due back to you. And you can then apply to have monthly VAT Returns, which will help with cash flow.
Quite different are exempt supplies, such as financial services, insurance, health, education. If you fall into this category, then you cannot recover VAT, since you cannot register for VAT. VAT is simply a cost to you in your business.
If your customers are private individuals, then you only issue an invoice if the customer asks for one. If you deal with other businesses then you must issue invoices for all your sales.
You must maintain an up-to-date and accurate record of invoices issued and payments received. This is essential for your VAT and Tax Returns. It also enables you to keep a record of how your business is going.
Claiming back VAT
‘Inputs’ are your purchases or costs. Input tax is VAT charged which you are entitled to claim back.
Once registered for VAT, you can start to claim back VAT you have paid out. A rule allows you to claim back VAT from before you were registered. HMRC Notice 700, chapter 11 explains this. It is sensible planning to claim this VAT once you are registered.
In order to claim back VAT, you must fulfil certain conditions.
First, the expenditure must relate directly to your business. So, you cannot claim for VAT on your new TV, or Christmas presents! If you work from home, some expenses will relate only partly to your business activity. You can only claim a proportion of the VAT incurred.
You can claim VAT on goods for resale, and on overheads. VAT Law does not make a distinction. So this includes professional fees, office costs, advertising, and web site costs.
Second, you must have a proper VAT invoice. When you deal with business suppliers, you will generally be given an invoice. If you buy from retailers, then you may have to ask for an invoice. You must retain these carefully. If you are unable to obtain an invoice, there is a concession which allows you to claim the VAT anyway.
A warning! If VAT has not been correctly charged, then you are not allowed to claim it. If you are not sure whether you should have been charged VAT, then find out. You may find it difficult to go back to a supplier years later, to ask him to refund VAT which he should not have charged you!
You should always check the VAT registration number given on an invoice to ensure it is a valid number. If it’s not a valid VAT number you could be liable for the VAT. ByteStart’s Guide on How to check if a VAT registration number is valid explains how to do this.
The 3rd and final part of ByteStart’s VatChat series covers the various special VAT schemes available to UK firms.
More help on ByteStart
For more information and help on dealing with VAT read ByteStart’s other guides;
- ByteStart’s guide to Value Added Tax (VAT) for start-ups and small businesses
- VAT registration – when should you register for VAT?
- Flat Rate VAT Scheme – an overview for small businesses
- What is the VAT cash accounting scheme?
For tips on accounting and tax try;
- How to choose the best online accounting software for your business
- 10 ways a small business owner can pay less tax
- Corporation Tax – How to reduce your bill
- Book-keeping basics every new business owner must know
- Using Research and Development tax relief to reduce your corporation tax bill
- How setting up a salary sacrifice scheme can reward staff and cut your tax bill
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- 5 things you must do when you go self employed
- 10 advantages running your business as a limited company has over being a sole trader
- How peer-to-peer lending offers start-ups and small businesses a new funding option
- Making your small business a BIG hit online – A Digital marketing guide for small business owners
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- What insurance policies are your business legally required to take out?