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Value Added Tax – VAT

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VAT (value added tax) is a tax on sales of goods and services. VAT affects almost every business transaction. A figure is set each year by the government, either the same as the previous year, or different, which if met by your company, you should register for VAT.

You need to register for VAT if your business satisfies any of the following statements:

  • If your taxable turnover in the previous year exceeded £60,000
  • If your taxable turnover in the next 30 days is expected to exceed £60,000
  • You must also register for VAT if you are currently or plan on trading with suppliers in EU countries.

How VAT works

A VAT registered business will pay VAT on purchases and charge VAT on sales. If a company receives more VAT than it spends, then it must pay the different to Customs and Excise, and it will be refunded if it pays more than it receives.

VAT registration

If your business supplied taxable goods and services amounting to more than £60,000 in the last 12 months or anticipate on doing so in the next 30 days, it must register for VAT. Any company below this threshold can voluntarily register for VAT, which can have it's advantages for the business.

Once you are VAT registered

From the date of VAT registration, all sales must have VAT invoices. There are exceptions where full VAT invoices are not required, these can be found on the Customs and Excise website. You will need to keep a record of the amount of VAT you charge in your records. This is your output tax.

You must have a VAT invoice for all purchases in order to be able to claim back the VAT you pay. You should keep a seperate record of the amount of VAT you spend. This is your input tax. Before you get your invoices printed, it's a good idea to check that they contain all the necessary VAT information.

Three rates of VAT

It is important to know how much you should be charging on sales in order to meet your VAT obligations.

  • a standard rate, 17.5 per cent
  • a reduced rate, 5 per cent - see a list of goods and services currently charged at the reduced rate on the Customs and Excise website
  • a zero rate, 0 per cent - discover areas of business where you will need to check if your goods and services are zero rated on the Customs and Excise website

Information can be obtained from Customs and Excise to see if any of your services or goods are tax exempt.

The crucial difference between goods that are zero-rated and goods that are exempt is that if your business supplies only goods and services that are exempt, then you can't register and claim the VAT back on your purchases. Some businesses sell some taxable and some exempt goods, this is classed as 'partly exempt', normally meaning they cannot claim back all VAT on purchases.

VAT returns and payments

VAT is usually accounted for on a quarterly basis, after registering for VAT, a tax period will be assigned and a VAT return will automatically be sent at the end of this period.

Returns can now be done electronically and over the internet via the Customs and Excise website. If you enrol for online payments you will still be sent a paper return as a reminder.

Your VAT return is used to detail the amount payable and how you have calculated it.

Your completed VAT return and the payment for the tax is normally due one month after the end of your tax period.