What is VAT?
Value Added Tax is more commonly known as VAT and is a tax on supplies. The exact amount of tax to be added is calculated using ‘the rate of VAT’ which is a percentage of the ‘price before tax’, that is, the price that would have been charged if there was no tax on it.
When your taxable turnover reaches a certain threshold, you must register for VAT. This applies whether you are in a business partnership, a Limited Company or an individual in business. Failing to register for VAT may leave you subject to penalties.
This VAT information section of our site is to provide guides and tips regarding registration, submitting returns, rates of VAT and more.
Overview of VAT basics
- Anyone whose turnover is below the threshold may still be able to register for VAT voluntarily.
- To register for VAT, an Application for Registration form (Form VAT 1) should be completed and submitted to HMRC. To do this online visit www.gov.uk website. It is also possible to submit the application in writing by downloading and printing the form which is also on the gov.uk website.
- A unique VAT Registration Number, which must be shown on invoices raised to customers, will be issued following the registration process.
- The VAT registration date will be confirmed and this is the date that VAT must be charged on sales and then accounted to HMRC.
- VAT is normally charged at 20% but some sales may be chargeable to VAT at 5% or even at 0% . Sales that are subject to 20%, 5% or 0% are all known as ‘taxable sales’.
- Some sales will not incur VAT and are known as ‘not taxable sales’.
- Once registered, VAT charged to business purchases and expenses can be claimed for although rules and restriction do apply.
- Invoices and receipts should be retained for the purchases and expenses on which VAT is being claimed.
- VAT returns (used to claim VAT on purchases) are normally sent to HMRC each quarter. Daily records should be kept regarding the figures declared on the return.
- If the VAT due on sales is greater than the VAT being claimed on purchases, then the balance will be payable to HMRC. If the VAT being claimed on purchases is greater than the VAT due on sales, then HMRC will repay the balance.
Schemes to assist small businesses include:
Flat Rate Scheme – this scheme helps by reducing the amount of detailed VAT records that are required.
Cash Accounting – this scheme helps small businesses with cashflow. It requires VAT on sales when your customer pays you to be accounted for. VAT can only be claimed on purchases and expenses once have paid for.
Annual Accounting – with this scheme only one VAT return is due to be submitted to HMRC each year.