What do you need to know about VAT?

Apr 13, 2022

Value Added Tax, featuring on receipts across the country, businesses large and small who are VAT-registered charge VAT on goods and services. This raises income for the government; but what is it, what does it mean for your business, why and how do you go VAT- registered? Find out all the answers you need to know about VAT below.

 

What is VAT?

 

Value Added Tax is an added percentage of and onto goods and services. The standard VAT rate is 20%, as a VAT-registered business 20% must be added to all sales. In countries other than the UK, VAT is also called goods and services tax. As a form of consumption tax, it is the consumer who pays this tax. Although individual businesses pay this tax to HMRC, the customer has already paid this amount on the goods and services provided. 

 

Who can be VAT registered?

 

There are a variety of reasons why a company would be VAT-registered and a variety of businesses that can be. The tax threshold is £85,000. Any business that has a taxable turnover above this amount must be VAT-registered. However, businesses can also be voluntarily VAT-registered below this threshold. Insurance, postal and health services are examples of business types that are VAT exempt. 

 

How do you charge VAT?

 

It's crucial that VAT-registered businesses correctly charge VAT for their VAT returns. An invoice must include an invoice number, date, name, business address, VAT registration number, all the customer's details and a detailed description of the goods or services. The items must detail the unit price excluding VAT along with the quantity sold, show the VAT rate, the total amount excluding VAT, the total amount of applicable VAT and any other savings or discount offerings. 

 

What VAT alternatives are available for small businesses?

 

There are several schemes that could help small businesses with handling VAT. They include the cash accounting scheme, the annual accounting scheme and the flat rate scheme. The cash accounting scheme businesses are able to calculate their liability from the payments they receive and make instead of adding VAT to individual invoices. The annual accounting scheme allows businesses to make one VAT return a year, simplifying accounting and the flat rate scheme involves multiple steps. Invoices are made with an added 20% of VAT, then a flat rate is applied to the VAT inclusive total. The VAT inclusive total is the amount to be paid to HMRC. Expenses are not included other than expenditures over £2,000 or more including VAT. 

 

Why would I register for VAT as a small business?

 

Sole traders and limited companies have to register for VAT if they exceed the threshold. The largest benefit to becoming VAT registered is the increased and better cash flow due to the amount that can be claimed back in business VAT costs. Businesses can choose to voluntarily become VAT registered because it helps them maintain their competitive selling price. 

 

What are the advantages of VAT?

 

  • Relevant purchases within the businesses trade can be recovered. 

 

  • The image the business portrays to clients, customers, traders and other businesses make it appear larger in size. 

 

  • VAT registration increases credibility. 

 

  • Some suppliers will only trade with other VAT registered businesses allowing greater flexibility in sourcing materials and other goods at competitive prices.

 

What are the disadvantages of VAT?

 

  • Either quarterly, monthly or on the annual accounting scheme, a business is required to submit a VAT return to HMRC.

 

  • VAT invoices will have to be raised when making a transaction. 

 

  • An appropriate rate of VAT must be applied to the correct goods and services the business provides. 

 

  • There will be an increased amount of administrative work that will need to be completed.

 

How does VAT differ across the UK?

 

The standard rate of VAT does not change across the UK and remains at 20%. Charities have differences in how they are charged VAT on goods and services and in some cases, like for child’s safety goods or home energy, the rate is reduced to 5%. 

 

Where can I find more answers about VAT?

 

For general enquiries, you can find information here: VAT: general enquiries - GOV.UK including the capability of calling to speak to the Gover helpline. 

 

Disclaimer: Nothing on this page should be construed as legal, financial or tax advice. If you’d like to speak to a professional advisor on the subject, please get in touch at [email protected]

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