Understanding VAT can be complicated especially if you’re a business owner. This blog includes an explanation of what VAT is, the rate of VAT and points to ensure your VAT return suffices HMRC standards. If you’re a business owner, this guide is perfect for you.
What is Value Added Tax?
Value Added Tax (VAT) is a form of consumption tax. For a business, understanding VAT is crucial as it plays a vital role in the business.
This tax is ultimately an additional cost to the goods and services. It is essentially paid by the consumer, though it is an indirect tax to the business in which they must pay the tax to HMRC.
What goods and services are charged?
- Business sales
- Loaning goods
- Staff sales such as hot meals provided in a canteen
- Business goods that are used for personal reasons
- Selling your business assets
3 types of rates
The rate of VAT rate that applies to your business will depend on the types of goods and services you sell. The rate of VAT will be added onto the price of the item you are selling. The higher the percentage of the rate of VAT rate, the more the consumer pays.
- The rate of VAT for the standard criteria is 20%
- Majority of goods and services are in this category
- The rate of VAT for the reduced rate is 5%
- Applies to specific products such as children’s car seats, domestic fuel or power and mobility aids.
- The rate of VAT for the zero rate criteria is 0%
- Applies to essential items such as, some food products, books, newspapers, children’s clothes and motorcycle helmets.
- Although the rate of VAT is 0%, it must be recorded on your VAT accounts and be reported on your VAT return.
Your business is legally required to register for VAT once your turnover is more than £85,000. Once registered, your business is required to charge VAT on all goods and services.
Additionally, you can reclaim VAT on goods or services used for the business operations such as:
- Staff travel
- Work phones
- Vehicles used for business
- Utility bills
Who is exempt?
- Charitable fundraising
- Selling/letting commercial properties
- Insurance/finance services
- Postage stamps
Your registered number
Your VAT number can be found on your business’s VAT registration certificate. The number is only given to VAT registered businesses. Your business certificate will state:
- The date from which your business went over the VAT threshold and was legally required to register
- when your first VAT return is due
It is your responsibility to place VAT on goods or services that are legally required to be charged to consumers.
You must keep a VAT record and a VAT account
You must also charge VAT on items that are on sale even if it is exchangeable.
Business must report to HMRC the amount of VAT they have charged to consumers. Moreover, they must report the amount paid to HMRC via a VAT return. The VAT return must be completed every 3 months even if you do not have any VAT to report.
If you have overcharged VAT to a consumer, it must be paid to HMRC
You can reclaim VAT if you have paid more VAT than you have charged your consumers.
Making tax digital
Businesses with a turnover of £85,000 must follow rules for ‘Making Tax Digital’ and keep records for VAT digitally. Visit the GOV website for further information. Exceptions apply if:
- You apply for an exemption
- If you’re a government department
- Part of the NHS Trust
Additionally, you can choose to sign up if your business earns less than the VAT threshold. However, from April 2022 all VAT registered businesses are required to sign up to ‘Making Tax Digital’ however much the business income is.
The following records must be kept digitally:
- Business name
- Business address
- VAT registration number
- VAT accounting scheme your business uses
- The rate of VAT that is charged on the goods and services you supply
- The vat on goods and services your business supplies
- The vat on goods and services your business receives
- Any adjustments made on a return
- Values on the goods and services before VAT is added on (everything that is bought and sold)
- The rate of VAT on the products before and after sale price
- Transactions must be added up and added on to the digital records.