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 20% from 4th January 2011 (previously it was 17.5%).
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 £73,000 (from 1st April 2011. Previously it was £70,000), or the value of your taxable supplies in the next 30 days alone is expected to exceed this threshold.
This threshold applies for the 20011/12 tax year, and usually increases each tax year by £1,000 or so. It is important to remember that turnover is the amount of sales the business is making, not the profit.
Registering for VAT may be beneficial
Even if your business turnover lies below the current VAT threshold, you can still register for VAT, since there may be business benefits in doing so. It is worth checking this with your accountant or directly 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.
Since April 2010, most businesses have to submit their VAT returns online, and pay their VAT liabilities electronically.
From April 2012, all businesses regardless of size and incorporation date will need to submit their returns online and pay their VAT bills online. You can read more about the transfer from paper to online VAT payments here.
Further VAT information
This article provides a very high level outline of standard business VAT. 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.
For more detail, you can also visit the dedicated HMRC VAT section.