Value Added Tax (VAT) is a charge on most goods and services sold in the UK.
Ultimately, the person who consumes the goods pays the tax. But to administer it, VAT is charged and reclaimed by every supplier down the chain.
The standard rate of VAT is currently 20%. There are other rates, depending on the product or service concerned.
All businesses must pay VAT, or input tax as it is also known, on purchases.
VAT-registered businesses can reclaim the VAT paid on purchases, but must also charge VAT on any goods or services they provide (output tax).
If your business generates more output than input tax, you must pay the difference to HMRC at least once every quarter. This process, both submitting your VAT return and paying your liabilities is now done online.
If you are owed VAT in a given quarter, HMRC will refund the difference.
When to register for VAT
If your annual taxable turnover exceeds the current VAT registration threshold, your business must register for VAT.
The current threshold is £85,000 (from 1st April 2020). You must register if your VAT taxable turnover for the previous 12 months exceeds this threshold, or if you anticipate you will do so in the next 30 days. It’s important to realise that the threshold applies to your VAT taxable turnover, not your profits.
The registration threshold usually increases by a few thousand pounds every year.
You may decide to register for VAT even if your turnover has not reached the threshold. There may even be financial benefits to doing so, especially if you need to buy a lot of supplies as you get your new business launched.
Some people voluntarily register their business for VAT because they feel it helps with the credibility of their business. Make sure you ask your accountant if you have any questions.
Once you are registered for VAT, you will need to add this amount to your prices to customers. You will also need to keep on top of all your paperwork and invoices.
Make sure you are not late submitting your VAT returns, or your payments. HMRC can set up a direct debit for you to ensure that this doesn’t happen.
Different VAT schemes
The Flat Rate VAT scheme provides eligible businesses with a fixed percentage of turnover that has to be paid as VAT annually (the percentage depends on your industry sector). This simplified approach can cut down the time you spend on VAT calculations and administration.
You can apply to the scheme if your annual turnover excluding VAT is £150,000 or under.
If you are accepted into the scheme, you may also qualify for an extra 1% reduction in your flat rate percentage for the first year.
Only your accountant will be able to say if your business would be better off using the Flat Rate scheme or not – it depends on your industry sector and the specific situation of your business.
For further guides on VAT visit ByteStart’s VAT section.
Last updated - 11th October, 2019