In this short guide, we will walk you through the basics of Value Added Tax (VAT), VAT registration and some alternative VAT schemes. We want to ensure that you have a clear understanding of your VAT obligations as a business owner. Whether you’re a small startup or an established corporation, complying with VAT registration requirements is crucial. Not only to avoid penalties, but to maintain the financial standing of your business. Navigating the intricacies of VAT is an essential aspect of running a business in the UK.
What is VAT?
VAT is an acronym for a consumption tax that HMRC impose on the value added to goods and services. VAT is a consumption tax imposed on the value added to goods and services. This value can be added at various stages of production and distribution. ). This includes goods and services that you sell (if you are VAT registered) and goods and services that you purchase. Input VAT is the common term for VAT on purchases, while output VAT refers to VAT on sales. If your business is VAT registered, you are responsible for collecting, reporting, and remitting this tax to HM Revenue and Customs (HMRC).
Now, let’s talk bands! VAT operates in three distinct bands:
- ‘Standard’ rate: 20%
- ‘Reduced’ rate: 5%
- ‘Zero’ rate: 0%
Most items sold in the UK are standard rates for VAT. Reduced rate VAT applies to certain products and services such as domestic energy supply and children’s car seats. Zero rate VAT applies to children’s clothing, books and certain food items.
Do I need to Register for VAT?
You only charge VAT to customers if you are VAT-registered with HMRC. You will need to register with HMRC for VAT if any of the following apply:
- The taxable turnover of the business reaches £90,000;
- You decide that you want to register for VAT voluntarily (see below);
- Your turnover (on a rolling 12-month basis) will exceed the registration limit;
- You purchase goods from other EU member states that exceed the registration limits;
- You take over a company that meets the above conditions.
Some items are exempt from VAT. That means VAT will not be charged on those items. This is different to an item being zero-rated. Examples of categories that include some exempt supplies include postal services, financial services, insurance (IPT is charged instead) and health and education.
Should I register for VAT?
If you meet the registration criteria above then it’s a definite yes as you will be breaking the law if not. Even if you do not meet the criteria or registration threshold, you can apply to voluntarily register with HMRC for VAT. Potential benefits of voluntary registration include:
- Increased credibility;
- Some companies will only deal with VAT-registered businesses.
- Potential tax savings if you supply reduced or zero-rated products but can still reclaim the VAT on your standard rate purchases. This is also the case if you mainly sell business to business and most of your customers are VAT registered.
How do I pay VAT to HMRC?
You will have to complete a VAT return every quarter (unless you are on the annual accounting scheme). The VAT return will take the VAT you charge on your sales (output VAT) and deduct the amount of VAT you were charged on your purchases (input VAT). If you have a positive number remaining you owe HMRC the balance and if you have a negative number, HMRC will refund you the amount. In effect, you are a mini tax collector for the HMRC! You can complete your VAT return and pay any VAT due to HMRC online.
Alternative Options for VAT registration?
You can’t get out of it that easily! However, HMRC offers several options that will help small businesses in various ways:
- Cash accounting scheme: The cash accounting scheme allows you to pay VAT on your sales when you receive payment from your customers and reclaim VAT on purchases when you pay suppliers. It helps small businesses manage their cash flow more easily but is only available to businesses with taxable turnover of less than £1.35m. If you want more tips on cash flow management, see our handy guide here.
- Annual accounting scheme: This scheme allows you to submit one VAT return per year rather than one every quarter. The business needs to submit nine payments on account and a balancing payment when they submit the VAT return. It reduces the administration burden on small businesses but is only available to businesses with a turnover of less than £1.35m.
- Flat rate scheme: To join the flat rate scheme your taxable turnover must be less than £150,000. You pay a fixed rate of VAT to HMRC depending on the type of business you carry out (for example, a Vet would pay 11%). You keep the difference between what you charge your customers (usually 20%) and the flat rate percentage. However, you cannot reclaim VAT on purchases (input VAT) unless the purchase is of a capital asset over £2,000.
Conclusion
Remember that VAT regulations can change, so it’s crucial to stay updated with the latest guidelines provided by HMRC to ensure you meet your VAT obligations accurately and on time. Failure to comply with VAT regulations can result in penalties and interest charges, so it’s essential to take your VAT responsibilities seriously.