Understanding VAT payments can be complicated 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 VAT?
Value Added Tax (VAT) is a form of consumption tax. This cost is added to goods and services and is essentially paid by consumers. However, in business you will need to understand VAT as it plays a vital role in the business. VAT is considered as an indirect tax which is used to indicate the current status of cash flow in the business and if any tax is overdue to tax authorities.
VAT Goods and services charged to you?
- Business sales
- Loaning goods
- Staff sales such as hot meals provided in a canteen
- Personal business goods
- Selling your business assets
3 types of rates of VAT
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 will pay.
- 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 you have achieved a turnover of 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
Goods & Services exempt from VAT?
- Postage stamps
- Charitable fundraisers
- Selling/letting commercial properties
- Insurance/finance services
Your registered number?
You can find your VAT number on your business’s VAT registration certificate.
Your business certificate should state:
- When your business meets the VAT threshold
- When your first VAT return is due
What are you responsible for?
It is your responsibility to place VAT on goods or services that are legally required to be charged to consumers.
You must also charge VAT on items that are on sale even if it is exchangeable.
In order to do this, you will need to have kept a VAT record and a VAT account
When you become a business owner, you must report to HMRC the amount of VAT that is being charged to consumers.
The VAT return must be completed every 3 months even if you do not have any VAT to report.
You can reclaim VAT if you have paid more VAT than you have charged your consumers.
You can also reclaim on VAT if you have purchased goods and services for business-related purposes.
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 have applied for an exemption
- If you work in a government department
- If you are apart 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’.
Examples of Digital Records:
- The Business name
- The Business address
- VAT registration number
- VAT accounting scheme your business uses
- The VAT on goods and services your business supplies
- The VAT on goods and services your business receives
- Any adjustments made on a return
- The rate of VAT on the products before and after sale price