Value Added Tax (VAT) is a tax which is applied to transactions of most goods and services provided by VAT registered entities in the UK.
What is VAT?
There are three VAT rates currently – the standard rate (20%), a reduced rate (5%), and zero rate. Some items are completely exempt from VAT.
Unlike other taxes, VAT is collected on behalf of HMRC by registered businesses. Once you’re registered for VAT, you must charge the applicable rate of VAT on any services you provide, or products you sell.
If your business turns over more than £77,000 over a 12 month period (or of you expect to turnover this entire sum over the next 30 days), then you must register for VAT.
Even if you are not obliged to register for VAT, there may be other reasons why you decide to register voluntarily – it may be that in your industry, being VAT registered adds a more professional touch, or if you make a lot of purchases, you may want to reclaim the value of VAT on these items.
Each quarter, all VAT registered businesses must account for all the VAT they have charged to others, or paid out to suppliers.
Since 1st April 2012, virtually all businesses must submit their VAT returns online, and settle any outstanding tax liabilities electronically.
Input and Output VAT
The Output VAT is the amount of tax you have charged your customers or clients.
The Input VAT is the amount of tax you have paid for any purchases you have made.
If you subtract the total amount of Input VAT from the amount of Output VAT, and there is a positive number, you must pay this sum to HMRC.
The best place to get started is HMRC’s own Introduction to VAT which covers all the above points in further detail.
For more information from Bytestart, try our Value Added Tax guide.