VAT is a type of tax charged on goods or services by businesses that are VAT registered.
If a business is VAT Registered, it charges it’s customers VAT on the goods or services it provides and can normally reclaim VAT on goods or services that it buys.
Does my Business have to be VAT Registered?
VAT Registration is compulsory for businesses where their taxable turnover in a consecutive 12 month period exceeds the threshold (currently £85,000).
Registration is also compulsory if you expect your turnover to exceed the threshold within the next 30 days.
If you do not register for VAT on time, penalties, surcharges and interest can all apply.
If your turnover exceeds the threshold temporarily, you can apply for an exemption.
You can register for VAT voluntarily even if it is not compulsory – you may choose to do this for various reasons- if your customers are mainly VAT registered businesses, if your type of business will often receive VAT refunds (for example, a green grocer, newsagent etc), sometimes just to give the impression that your business is larger than it is.
What are the Rates of VAT?
Standard Rate – The standard rate of VAT is currently 20% – This is the rate that is charged on most goods and services in the UK unless it is classed as a reduced or zero rated supply.
(Slightly different Rates of VAT currently apply to the hospitality sector as part of the Governments Covid support package).
Reduced Rate – The reduced rate of VAT is currently 5% – This rate applies to domestic fuel, installation of energy saving equipment, sanitary products, children’s car seats etc.
Zero Rate – The zero rate of VAT is exactly that – 0% – This applies to basic food (not restaurant food or hot take aways), books, newspapers, children’s clothes, public transport amongst many other items.
Certain things, such as insurance, education, fundraising, providing credit are VAT Exempt. Some things such as MOT tests, wages, rates are Outside the Scope of VAT.
What are the different VAT Schemes?
Flat Rate Scheme – This Scheme is designed to make the administration of VAT easier. You can use the Scheme if your turnover is less than £150,000. The Scheme allows you to use a fixed rate percentage (dependant on the type of business) rather than reclaiming VAT on purchases, you can reclaim VAT on certain capital assets (such as a vehicle or equipment) costing more than £2,000.
Cash Accounting – This Scheme enables you to pay VAT on the sales that you have paid for rather than on the Invoices raised. This helps cash flow within businesses and is available if the business turnover is less than £1.35m
Annual Accounting – Rather filing a VAT Return each quarter you can complete one Annual VAT Return with the option of making estimated payments towards this during the year.
If you would like to discuss VAT or Registering for VAT in more detail, please feel free to contact us.