What is VAT?
VAT, or Value Added Tax, is broadly a tax on the sale of certain goods and services. VAT has been around in the UK since 1973 when Britain entered the European Economic Community (EEC). While the UK has now left the EU VAT regime, domestic VAT rules haven’t significantly changed following Brexit, but there are now different rules around imports and exports.
How does VAT affect my business?
If you’re a VAT-registered business (more on this later) you must charge VAT on your taxable sales and report income and expenditure figures accurately in a VAT return for HMRC generally every three months. You may also be able to reclaim VAT on goods or services you’ve bought as part of your business’s operations.
Do businesses pay VAT?
VAT is intended to be an end consumer tax rather than a business tax. If you’re a VAT-registered business you must pay VAT to HMRC on the sales you make, and report the VAT amounts you’ve charged customers. You will also be charged VAT on costs you incur and may be able to recover that VAT depending on the type of cost and how it is used in your business. When pricing your sales you may need to consider your cost base and the market you are selling to.
What does VAT registered mean?
If your taxable turnover exceeds £85,000 in the previous 12 months or is expected to do so in the next 30 days, you’ll have to register for VAT. If you are trading below the VAT registration threshold you can register voluntarily. Once you’re VAT registered, you’ll have the following responsibilities:
- you’ll need to charge customers the correct amount of VAT
- make sure you submit VAT returns
- pay HMRC any VAT that’s due
- create an online VAT account where you keep VAT records – by April 2022 you must sign up for ‘Making Tax Digital’ if registered for VAT but trading below the £85,000 threshold. VAT registered businesses trading above £85,000 file under the Making Tax Digital provisions.
So, while it’s great news if your company is growing, you’ll need to keep a watchful eye on your turnover as your tax responsibilities may increase once you’re liable for VAT.
Should I voluntarily register for VAT?
If you don’t meet the minimum turnover threshold, VAT registration isn’t compulsory, but some companies still choose to register. Here are some pros and cons of registering for VAT on a voluntary basis:
- becoming VAT-registered means you may be able to reclaim VAT on business purchases you make
- you may avoid fines for late registration if you happen to sneak above the £85,000 threshold one year
- if you think you may need to eventually become VAT-registered, doing this early could save you valuable time before your business grows and you’re occupied with other matters
- as a VAT-registered business, you’ll need to include VAT on your sales, so your products or services may seem more expensive to customers. You may need a solid pricing strategy to ensure your sales don’t dip
- you will have a new layer of admin, such as VAT invoicing and completing your VAT return. Keeping on top of your bookkeeping may help with this
- the extra paperwork required for VAT compliance could mean your accounting bills increase
How to get VAT registered
You can register for VAT online through GOV.UK; you’ll just need a Government Gateway user ID and password, which you can create if you don’t have one. Some businesses must register by post; and again, GOV.UK has all the relevant info. Once your registration has been approved, you’ll receive a VAT certificate and VAT number.
What is my VAT number?
Your VAT number is a nine-digit number you’ll receive once you’ve completed your VAT registration. It will be confirmed on your VAT certificate, which is sent to your government gateway account once you’ve registered for VAT. This usually takes around 30 working days. Your online account will also tell you when you need to complete your next VAT return.
It’s worth noting that the date you register for VAT is also the date you should start charging VAT, rather than waiting for your VAT number on your certificate. To add to the complexity, you’re not allowed to issue VAT invoices until your certificate arrives, even if you’re registered. You must send out VAT invoices to your VAT registered customers once you have your VAT number.
What are the VAT rates?
Once you’ve determined you’ll need to register for VAT, what VAT rate will you pay? Here’s a quick summary of the VAT rates for different goods and services:
When VAT is chargeable
The majority of goods and services
Certain goods and services, like domestic fuel
Qualifying goods and services, such as most food
Let’s look at some examples of when VAT is applicable and when it’s not.
Most food and drink incurs zero VAT, but there are exceptions, such as alcohol, confectionary, sports drinks and hot food, which are taxed at the standard VAT rate. Those with memories of the abandoned ‘pasty tax’ proposal will remember that pasties, pies and sausage rolls can be VAT-free, as although the food has been heated in an oven, it’s not being ‘kept warm’ at the point of sale.
Sales of donated goods at charity shops are zero-rated for VAT, while services like electricity incur the reduced 5% rate for domestic use, but the standard rate for businesses. Read more about different VAT rates on goods and services.
How is VAT calculated?
Luckily, you don’t have to be a mathematician to know how to calculate VAT, and here’s a simple formula for working out your VAT breakdown:
- Assuming it’s a VAT rate of 20%, to work out the VAT amount in a price including VAT, divide the VAT inclusive price by 120 (for a 5% rate, divide by 105).
- To calculate the pre-VAT total, multiply your result by 100.
- To work out the VAT amount, multiply the result from step one by 20 for a 20% rate, or by 5 for 5%.
There are other ways VAT can be calculated and GOV.UK
has more number crunching suggestions.
How to pay VAT
You generally need to pay VAT to HMRC every three months, which is your VAT accounting period. You can pay your VAT online, by standing order or Direct Debit, but not over the phone. It’s your responsibility to submit your VAT return with accurate records, and confirmation of the amount you owe. The return must be submitted with any tax payable by the due date.
How to reclaim VAT
You can usually reclaim the VAT you pay for items you’ve purchased for business purposes although some business may be subject to more restrictive recovery. Sometimes, you may be able to claim a proportion of expenditure; for example, a percentage of a mobile phone bill which is partially used for work purposes. When you submit a VAT return you can make your claim for a refund. Find out more about how to reclaim VAT.
Read more articles and guides
Tax can be tricky, but we hope our VAT guide has made your calculations a little less scary. To put your mind at rest further, we’ve got plenty more articles and guides at Tyl Talks to help you brave the business world:
- Business tax guide
- Getting investment for your business
- Inventory management explained
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
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