A Guide To VAT
Navigating the Essentials
Value Added Tax (VAT) can seem complicated at first glance, but understanding the fundamentals can make a real difference to your business. This guide breaks down the essentials of VAT in the UK, providing you with a clear overview to help you navigate this important tax.
VAT Basics:
What is VAT?
Essentially, VAT is a consumption tax. Every time you buy something in the UK, you will likely be paying VAT on it. This tax applies to most goods and services sold in the country, from your weekly groceries to your new laptop. The small added charge to normal prices goes towards funding public services.
How does VAT work?
Businesses play a key role in the VAT system. They act as collectors for HMRC (Her Majesty’s Revenue and Customs). When you sell something, you add VAT to the price and collect it from your customers and HMRC at regular intervals.
It is helpful to note that businesses can also reclaim any VAT they’ve paid on their own expenses. This means if you’ve purchased goods or services for your business, you can often recover the VAT you paid on those purchases, helping to offset your bill.
How Much Is VAT In The UK?
Not everything is taxed at the same rate. There are three main VAT rates in the UK:
Standard rate (20%): This is the most common rate, applying to the majority of goods and services sold in the UK. Examples include clothing, electronics, and entertainment.
Reduced rate (5%): This lower rate applies to certain goods and services that are considered essential or socially beneficial such as gas and electricity, and some energy-saving measures for homes.
Zero rate (0%): Some essential items are exempt from VAT altogether. This includes most food items (though there are exceptions like restaurant meals and confectionery), books, and children’s clothes.
It’s also important to be aware of the VAT threshold. Currently set at £85,000 (until 31st March 2024), this threshold determines whether your business needs to register for VAT. If your VAT taxable turnover exceeds this amount, you’re legally required to register and start charging VAT on your sales.
Who needs to register for VAT?
As mentioned above, surpassing the VAT threshold is the primary trigger for VAT registration. However, there are other scenarios where registration might be necessary, such as if you expect your turnover to exceed the threshold in a single 30-day period.
VAT Registration:
How to register for VAT
Registering for VAT is a straightforward process that can be done entirely online. You can register through the government’s website (gov.uk), where you’ll need to provide information about your business, such as your company name, address, and contact details. You’ll also need your National Insurance number and some details about your business activities.
Different VAT schemes
While the standard VAT accounting scheme is the most common, there are other schemes available that might be more suitable for your business. These include:
Flat rate scheme: This scheme simplifies VAT accounting by allowing you to pay a fixed percentage of your turnover to HMRC, rather than calculating the exact VAT you owe. This can be beneficial for businesses with low expenses.
Cash accounting scheme: This scheme allows you to account for VAT based on when you receive or make payments, rather than when the goods or services are supplied. This can be helpful for businesses with cash flow concerns.
Choosing the right VAT scheme
Selecting the most appropriate VAT scheme depends on various factors, including your business’s size, turnover, and the types of goods or services you provide. It’s crucial to carefully consider the pros and cons of each scheme before making a decision.
Voluntary VAT registration
Even if your turnover is below the VAT threshold, you might choose to register for VAT voluntarily. This can be advantageous for several reasons. Firstly, it allows you to reclaim VAT on your business expenses, which can improve your cash flow. Secondly, being VAT registered can enhance your business’s image and make you appear more established and professional to clients and suppliers.
VAT Returns:
How to complete a VAT return
VAT returns are submitted to HMRC at regular intervals, usually quarterly. These returns require you to report your total sales and purchases for the period, along with the amount of VAT you’ve charged and the VAT you’ve paid on expenses. The difference between these two amounts is the VAT you owe to HMRC (or the amount you’re owed as a refund).
Deadlines and penalties
HMRC sets strict deadlines for submitting VAT returns and making payments. It’s crucial to adhere to these deadlines to avoid incurring penalties. Late submissions or payments can result in fines, interest charges, and even legal action in severe cases.
Common mistakes to avoid
When completing your VAT return, it’s important to be diligent and avoid common errors. These can include simple mistakes like incorrect calculations, using the wrong VAT rates, or forgetting to include certain transactions. Other common pitfalls include missing deadlines, failing to keep adequate records, and not understanding the specific rules for your chosen VAT scheme.
VAT record keeping
Maintaining accurate and organised records is essential for VAT compliance. You need to keep detailed records of all your business transactions, including sales invoices, purchase receipts, bank statements, and any other documentation related to VAT. These records must be kept for at least six years and should be readily available for inspection by HMRC if required.
Get VAT Specialist Help
We understand that navigating the world of VAT can be a daunting task. From registration and choosing the right scheme to completing returns and staying compliant, there’s a lot to consider. Don’t let VAT complexities distract you from focusing on growing your business.
At Hartley Fowler, our team of experts are ready to support you every step of the way. Contact us today.