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 20%. And this applies to most sales of goods and services.
However, there are a range of supplies at 5% and 0%. Environmentally-friendly works to domestic properties, gas and electricity bills, and children’s car seats, are amongst those items falling within the reduced 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.
‘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!
The 3rd and final part of ByteStart’s VatChat series covers the various special VAT schemes available to UK firms.
This bulletin was provided to ByteStart by Les Howard of VATadvice.org.
Disclaimer: these VATChat articles are brief introductory comments on some areas of VAT, You will appreciate that whilst every effort is taken to ensure accuracy, your own circumstances may be sufficiently different, such the VAT outcome is not the same. Therefore please do not rely on the article as ‘professional advice.’ In all cases it is recommended that you seek advice applicable to your own situation.