“Disclaimer: Nothing on this page should be construed as legal, financial or tax advice. Please always consult a knowledgeable professional advisor.”
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.
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
- Things bought from other EU countries
More information on VAT reclaims can be found on the gov.uk website.