Value Added Tax (VAT) is charged on most goods and services provided by businesses in the UK. But smaller businesses do not need to register for VAT until their turnover reaches a certain level.
If your business has a turnover of £79,000 or more then it needs to be VAT-registered. Even if you are a small start-up business then you should still be aware of VAT as your turnover could quickly go over that limit. You can also choose to register for VAT even if your turnover is below this limit - this may be useful if you pay a lot of VAT on goods and services which you buy as part of your business. Some companies also choose to become VAT-registered earlier than they need to, in order to present a more professional image.
You must charge your customers 20% VAT for the goods and services you provide unless they are exempt. Services which are exempt include insurance, some services offered by doctors and dentists and some types of education and training.
For some items, a reduced VAT rate of 5% should be charged. These include children’s car seats, domestic fuel and power and sanitary hygiene products.
On the positive side, if you are VAT-registered, you will be able to reclaim any VAT which you have paid on goods and services for your business.
The VAT you add to the sale price of your goods or services is your output tax, while the VAT you pay is your input tax.
You will need to regularly submit a VAT Return, usually every quarter. Your return will need to show both your output tax and your input tax. If you have paid more VAT than you have charged, you will be able to claim the difference from HM Revenue & Customs. If you have charged more VAT than you have paid, then you need to send the difference to HMRC when you submit your return.
If your company’s turnover is less than £150,000 you can choose to register for flat rate VAT. Under this scheme, you will pay a flat percentage of your turnover as VAT, dependent on what sector your business in, which will be lower than the normal 20%. However, you cannot reclaim VAT on your purchases. This system makes it quicker and easier for businesses, particularly start-ups, to be able to calculate their VAT liability each quarter and can also create savings if a lot of your suppliers are not VAT registered.
If you need any help with VAT or any other matters relating to money and your business, it is always best to seek professional advice from an accountant.