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Everyone is sure to have heard of value-added tax (VAT) and have a notion of what it means for them as a customer (aka. a price-bump to most purchases). But if you’re a business then your knowledge of VAT should extend far beyond the extra pennies it adds to your weekly shop. In fact, your business’ handling of VAT may be the difference between your company running legally or not.
What is VAT?
VAT is a form of consumption tax – that is a tax applied to purchases of goods or services and other ‘taxable supplies’. For a business, VAT plays an important role and can be charged on a range of your goods and services. Charities will have different rules governing their VAT. But for many businesses, areas that are taxable include:
- Sales of your goods and/or services
- The hire or loan of your goods
- Exchanges e.g. swapping a new product for the exchange of the customer’s old one
- Staff sales e.g. staff meals
- Business goods you use personally
- The sale of business assets
VAT is a tax which is ultimately paid by the consumer, and is not a tax on individual businesses. While businesses pay VAT to Her Majesty’s Revenue and Customs (HMRC), the actual cost has already been paid by the customer, covered by the purchase price of goods or services bought. As such, it is an indirect tax though businesses are responsible for reporting it fully to HMRC.
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What is the VAT Threshold? Do I Need to Register my Business?
If your business turnover is more than £85,000 you are legally required to register for VAT. This will require you to charge VAT on all services or goods offered by your business - you can only charge VAT if you are registered to do so. VAT registration will also allow you to reclaim VAT on goods and services purchased by your business.
What is My VAT Number?
Company VAT numbers are given only to VAT-registered businesses and can be found on your business’ VAT registration certificate. This important piece of paperwork will also outline when your first VAT return is due and the date from which your company went over the UK VAT registration threshold and therefore became required to register.
What are My VAT Responsibilities?
As a VAT-registered company, you must charge VAT on your goods or services, and can also reclaim VAT on those you have purchased for business-related purposes.
VAT charged by your business is calculated on the full value of what it is you sell. VAT must be applied to sales even if you operate based on an exchange or part-exchange basis. If you charge a customer without the inclusion of VAT, the sales price you do charge will still be considered inclusive of VAT by HMRC.
VAT-registered businesses must report the amount of VAT they have charged or paid to HRMC via a VAT return usually completed once every 3 months. You must complete this even if you have no VAT to report.
Over-charges of VAT by you to the customer must be paid to HMRC. If you have paid more VAT than you have charged your customers then this difference can be reclaimed from HMRC.
What is the Current Rate of VAT?
The current VAT rates are as follows:
|Rate||% of VAT||Applicable to|
|Standard||20||The majority of goods and services|
|Reduced||5||Select goods and services e.g. power bills|
|Zero||0||Zero-rated goods and services e.g. children’s clothes|
What is Exempt from VAT?
The rate of VAT depends on the nature of the good or service being purchased. Some services and goods are in fact VAT exempt. These include:
- Education or training
- Charitable fund raising
- Selling or letting commercial properties
- Insurance and finance services
- Postage stamps
You can see precisely which level of VAT relates to which type of service or product on the gov.uk website.
What is the Difference Between ‘Zero-Rate’ and ‘VAT Exempt’?
Zero-rated supplies are not charged VAT in a traditional sense but at the rate of 0%, allowing businesses which supply these items or services to recover the VAT on their business overheads and costs. VAT exempt supplies are not eligible for VAT reclaims.
If your business offers only VAT exempt supplies then you are not required to register for VAT.
What Can I Reclaim VAT On?
Businesses can reclaim VAT on goods or services used specifically for their operation. Claiming VAT back is possible for things such as:
- Staff travel
- Mobile service plans used for business calls
- Vehicles used only for business
- Fuel, accessories and maintenance for said vehicles
- Utility bills if you are a home business (proportional to the percentage of utilities used for business needs)
Some things are not eligible for VAT reclaims, these include:
- Entertainment costs
- Anything that is purely for private use
- Business assets transferred to you as a going concern
More information on VAT reclaims can be found on the gov.uk website.
Changes to VAT After Brexit
The domestic VAT rules affecting your business should stay the same following the UK’s departure from the European Union in 2021. Things are now a little more complicated if you regularly import and export goods to or from the continent. Let’s turn our attention to the key changes to VAT after Brexit.
New rules around EU import VAT
The UK left the EU’s VAT regime at the beginning of 2021. This means countries within the EU are now treated the same as those outside the EU when it comes to value added tax. In other words, any goods coming in from the EU and elsewhere must now account for import VAT if they’re valued above £135.
Goods become subject to import VAT when they enter free circulation – for example when they’re going through a UK port. Your business can choose to pay import VAT at this stage and later reclaim it from HMRC using C79 certificates.
Alternatively, you can now take advantage of a ‘postponed accounting’ system for VAT, introduced by the Government in January 2021. In a nutshell, it gives you the chance to account for any import VAT using your VAT return instead. It means you don’t have to pay the tax as soon as your goods arrive in the UK and then reclaim it.
If your company imports EU goods with a value under £135, you should declare the value added tax on your next VAT return using the reverse charge procedure.
Reforms to EU export VAT
If your business sends goods across the Channel, you’ll need to know the EU export VAT rules, which came into force in January 2021.
Since EU countries are now treated the same as those outside the EUs, your exports to Europe will be zero-rated for UK VAT – with a 0% rate applying. It means you won’t pay UK value added tax on your goods, although they’ll still need to be included in your VAT accounting.
It’s important to note that if you’re sending goods directly to consumers on the continent, you’ll need to research whether EU VAT registration is required in the countries you serve.
Why Northern Ireland’s trade rules are different
The Brexit deal agreed between Britain and the EU handed a special trade status to Northern Ireland. The aim was to avoid a hard customs border on the island of Ireland. This might be something to factor into your VAT planning, with more information available from the official government website.
New changes to VAT in 2022
As a reaction to the COVID-19 pandemic, the UK government brought in a New Payments for COVID VAT deferral system in February 2021. This allowed taxpayers to pay deferred VAT payments from that year in interest-free instalments. The scheme has now ended, so any unpaid amounts may be subject to interest and/or penalties.
July 2020 saw a temporary reduced VAT rate for the hospitality, hotel and holiday accommodation industries. The rate slash, from 20% to 5%, was brought in to boost customer demand in response to the economic difficulties caused by the pandemic. This lasted until the rate was increased to 12.5% in October 2021.The rate for all these sectors returns to 20% in April 2022.
Until now, Making Tax Digital for VAT has meant businesses with a taxable turnover of more than £85,000 were required to make digital records of their VAT data and submit returns digitally. As of this April, the rule applies to all VAT registered businesses.
The government has introduced a new requirement that will require large businesses to inform HMRC when they take a tax position in their VAT returns which is considered uncertain. More information on this measure can be found on the gov.uk website.
Businesses that need to consider the trade rules with Northern Ireland will want to keep a close eye on renegotiations between the UK and EU over the terms of the Northern Ireland Protocol. There is potential that the UK triggers Article 16, which allows either party to suspend all or part of the protocol if they believe the operation leads to serious ‘economic, societal or environmental difficulties’ that could persist. Should this happen, relations between the UK and EU could reach the point in which the EU may suspend or even terminate the EU-UK Trade and Cooperation Agreement. This would mean, tariffs or extra licences and checks on imports from the UK could be introduced, or cooperation may end in areas including research programmes.