Understanding the intricacies of Value Added Tax (VAT) and its application to your business is essential for any business owner. In this article, we will delve into VAT, covering topics such as VAT registration, claiming VAT back, and the current VAT rates.
What is VAT?
VAT, or Value Added Tax, is a tax imposed on goods and services provided by businesses in the UK. If your business is liable to pay VAT, you must charge the appropriate rate when selling goods or services to your customers and remit the collected VAT to HMRC on a quarterly basis. Thanks to HMRC’s Making Tax Digital initiative, VAT returns are now filed digitally. Understanding the accounting and tax planning implications of VAT is crucial for any business that crosses the small business VAT threshold.
It is important to note the following key points:
- VAT is charged when you sell goods and services to your customers.
- VAT is paid when you purchase raw materials, stock, or services for your business.
The crucial aspect to understand is that if your business is VAT registered, you can claim back any VAT you have paid as a business expense. This means that you only pay HMRC the difference between the VAT you have charged your customers and the VAT you have paid. If you find that you have paid more in VAT than you have collected from your customers, HMRC will cover the difference.
Determining whether your business needs to register for VAT depends on its turnover, which refers to the total sales made annually. Currently, if your turnover exceeds £85,000, you must register your business for VAT and start charging it on your goods or services.
There are advantages to voluntarily registering for VAT before reaching the £85,000 threshold. Registering enables you to claim back VAT paid to other VAT registered businesses and can enhance the perception of your business’s established status.
How to register?
Registering for VAT is a quick and straightforward process. If you have an accountant, they can register on your behalf. Alternatively, you can register through HMRC’s online portal. When registering online, you will need to provide essential information such as your company’s name (if applicable), National Insurance number, Unique Taxpayer Reference (UTR), business turnover, details about your business, and your bank details. Once registered, you will receive a VAT Registration Certificate within 30 working days, containing your unique VAT number, which you will reference when submitting VAT returns. It will also include the deadline for your first VAT return, a crucial date that establishes the benchmark for subsequent quarterly returns.
After registering for VAT, you must determine which VAT rates apply to the goods or services you provide. The standard rate of VAT is currently 20%, covering most goods and services. However, there are exceptions, such as a reduced rate of 5% for specific items like domestic energy and children’s car seats, as well as a zero rate where no VAT is charged for goods such as food, children’s clothing, and books. If you need to charge VAT for your goods or services, it is important to include the relevant details on your customer invoices.
How to File a VAT Return?
VAT returns must be submitted within one month and seven days after the end of a VAT period. To determine the specific due dates for your returns and payments, you can access the information through your VAT account online. Submitting your VAT return is a relatively straightforward process once you have your VAT number and have set up your VAT account online. HMRC offers a free online service, although if you have joined the Making Tax Digital program, you will need to submit your return using compatible accounting software.
While we strive to provide assistance to the best of our ability, it is important to note that the information presented here is solely for informational purposes and should not be construed as financial or legal advice. 360 Accounting bears no responsibility or liability for any loss or damage that may arise directly or indirectly from the use or reliance upon the information provided. If you have any inquiries, it is advised to consult with your professional advisor or seek independent legal advice.
If you need help in filing your VAT, look no further than 360 Accounting!
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