A guide to VAT in the UK

a guide to uk VAT
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What is VAT?

In brief, Value-Added Tax, is a tax charged on the sale of most goods and services in the UK. VAT is known as an indirect tax since VAT-registered companies collect it on behalf of the government. The first fact to note is that a business can only charge and claim VAT if it is registered for VAT.

Is it mandatory to register for VAT in the UK?

It isn’t a must to register for VAT. However, if the business’s annual turnover exceeds or expects to exceed the threshold of £85,000, then the company must register for VAT.

An entity can still register for VAT, even if its annual turnover doesn’t exceed the threshold of £85,000. This registration is done voluntarily, and the business will have to take on the same responsibilities as businesses required to register for VAT.

Who isn’t allowed to register for VAT?

Businesses that solely sell VAT-exempt goods and services aren’t allowed to register for VAT. In addition, the firm also cannot reclaim VAT on any business expense even if taxable items are purchased, and VAT is paid.

What are the rates for VAT?

There are currently three rates for VAT in the UK:

The Standard Rate (20%):

The VAT rate charged for most goods and services in the UK is the standard rate of 20%. Unless or otherwise, the goods or services are classed as reduced or zero-rated.

This applies to goods you supply form Northern Ireland to EU customers who are under non-VAT terms that are below the distance selling threshold. If you go beyond the threshold, you will need to register your business for VAT in that country.

The Reduced Rate (5%)

This VAT rate is 5%, which applies to organizations that make hospitality, hotel and holiday accommodation and admission to certain attractions and their advisers.

In addition, domestic fuel and power, children’s car seats and mobility aids for the elderly are few other transactions subject to the reduced VAT rate of 5%.

The Zero Rate (0%)

Zero-rated means that the goods are subject to VAT, but the rate of VAT you must charge your customers is 0%. You cannot void recording them in your VAT accounts; it is a must to record them in your accounts and report them on your VAT return.

A few examples of zero-rated items include children’s clothing and shoes, books, and newspapers.

VAT exemptions and out-of-scope sales

VAT charges do not apply to all products and services. Some items such as insurance, antiques, arts, and educational training are exempt from VAT. Other items such as statutory fees are out of scope (they sit outside the tax system). It would be beneficial if you remembered that being exempt or out of scope is different from charging 0% VAT.

Can I claim VAT on business expenses?

When you incur an expense for your business, you’re usually charged VAT. If you’re registered for VAT, you can claim back the amount that you spend. You do this by reporting how much VAT you paid for those expenses.

Business expenses include elements such as stocks, work tools, computers, phones, and stationery. You cannot claim VAT on client entertainment.

What is needed for me to register my business for VAT?

To register, you will need:

  • A National Insurance (NI) number
  • If you’ve owned any business within the past two years, then details about those businesses.
  • Your business bank account details

How to register for VAT?

A business can register for VAT online, and by doing this, an online VAT account will be created called the Government Gateway Account. This account is needed to submit VAT returns to HM Revenue and Customs.

The business can also appoint an accountant to submit VAT returns and deal with HMRC on its behalf.

Types of Accounting VAT Schemes

During the process of registering for VAT, you will need to choose an appropriate VAT scheme. HMRC calculates your VAT based on the scheme you choose. It is advised to speak to an accountant to help determine the best VAT scheme which will suit your business.

There are four accounting schemes for VAT:

  • Standard VAT accounting
  • Annual VAT accounting scheme
  • Flat rate scheme
  • Cash accounting scheme

What happens when your business registers for VAT?

VAT is relatively straightforward; however, various thresholds, deadlines, rules, and regulations come into play around VAT, so it is crucial to understand the process and idea. It is also essential for a business to have a good accountant who can help select the most applicable VAT rate, as only a professional would know the details of the financial operations of the related business.

You should note that the business cannot claim back the entire amount it has paid if the wrong VAT amount has been applied to a sale. Hence it is vital to make sure that one charges the correct rate for VAT from the start of the business.

Once the entity selects the best VAT rate to be charged for the goods or services provided, the entity needs to gather all information regarding that before it starts trading and make sure:

  • To charge the correct rate of VAT for all the products and services
  • In a transaction where a single price is shown that includes or excludes VAT, then the right VAT amount must be worked out.
  • The information for any VAT related transaction must be shown on an invoice.
  • All transactions must be reflected in the VAT account
  • The total VAT amount to be charged or claimed should be shown on the VAT return.

What are the benefits gained by registering your business for VAT?

Firstly, the business can apply VAT to the sale of almost any product or service. You can also reclaim the VAT from HMRC on most products or services purchased from other companies. One of the significant benefits is that It’s great for marketing. Small businesses that are VAT registered can enhance their image by appearing more credible. It makes one’s business appear more professional.

Talk to WIS Accountancy about VAT

For expert and friendly UK VAT advice you can complete our website contact form or call us on 0203 011 1898 to speak to a member of the team.

You may also be interested in: Should I register for VAT?

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