Value Added Tax (VAT)

What Is VAT?

Value Added Tax, or VAT, is a form of consumption tax. It is added to products, materials or services.

What Are VAT Rates & How Do They Differ?

VAT rates vary according to the goods and services supplied. There are four main categories:

Standard Rate

This is 20% (as of 4th January 2011), and applied to all goods and services which do not fall into any other of the three main categories

Reduced Rate

A rate of 5% that includes fuel and power used in homes and by charities

Zero Rate

Charged on most food (but not restaurants or takeaway meals), children’s shoes and clothing, prescriptions, books and newspapers and new house sales. If the only goods that you supply are zero rated, you will not be required to register for VAT although you will have to apply for exemption from registration

Exempt Supplies

Including education, finance, insurance, and the services of doctors and dentists (but not some other services, such as osteopaths). This is no VAT charged on exempt supplies. If you only supply exempt services, you cannot usually register for VAT. However if you are VAT registered and have some exempt supplies, you may have difficulty claiming back all of your input tax

Who Can Register?

You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £82,000. You must register within 30 days of your business turnover exceeding the threshold. If you register late, you must pay what you owe from when you should have registered. You can register voluntarily if it’s below the threshold, unless everything you sell is exempt.

When you register you will be sent a VAT registration certificate. This confirms:

  • Your VAT number.
  • When to submit your first VAT return and payment.
  • Your ‘effective date of registration’ this is the date you went over the threshold, or the date you asked to register if it was voluntary.

Your VAT Responsibilities

From the effective date of registration you must:

  • Charge the right amount of VAT.
  • Pay any VAT due to HMRC.
  • Submit VAT returns.
  • Keep VAT records and a VAT account.

You can also reclaim the VAT you’ve paid on certain purchases made before you registered.

While You Wait

You can’t charge or show VAT on your invoices until you get your VAT number. However, you’ll still have to pay the VAT to HMRC for this period.

You should increase your prices to allow for this and tell your customers why. Once you’ve got your VAT number you can then reissue the invoices showing the VAT.

How To Register

Most business including partnerships and a group of companies registering under one VAT number can register online.

By doing so you’ll register for VAT and create a VAT online account (sometimes known as a ‘Government Gateway account’). You need this to submit your VAT Returns to HM Revenue and Customs (HMRC).

You can appoint an accountant to submit your VAT returns and deal with HMRC on your behalf once you’ve received your VAT number.

When You Can’t Register Online

You must register by post if:

  • You want to apply for a ‘registration exemption’
  • You’re an EU business ‘distance selling’ to the UK
  • You import (‘acquire’) goods from another EU country
  • You’re joining the Agricultural Flat Rate Scheme
  • You’re registering the divisions or business units of a body corporate under separate VAT numbers
  • You’re disposing of assets on which 8th or 13th Directive refunds have been claimed

Getting Your Certificate

You should receive a VAT registration certificate within 14 working days, though it can take longer.

It’s sent either:

  • To your VAT online account
  • By post – if an agent registers you or you can’t register online

VAT Returns

How to submit your VAT return

You must submit your return online unless:

  • Your business is subject to an insolvency procedure
  • You object to using computers on religious grounds
  • You can not because of your age, a disability, or because of where you live

If any of the above apply then you must contact HMRC to request paper return to be sent to you.

Sending Your First Return

You usually submit a VAT return to HMRC every 3 months. This period is known as your accounting period.

Your VAT return records:

  • Your total sales and purchases.
  • The amount of VAT you owe
  • The amount of VAT you can reclaim
  • The amount of your VAT Refund from HMRC

You must submit a VAT return even if you have no VAT to pay or reclaim