What is VAT?
VAT is a tax that’s charged on most business transactions in the UK. VAT registered businesses add VAT to the price they charge when they provide goods and services to:
- business customers – for example a clothing manufacturer adds VAT to the prices they charge a clothes shop
- non-business customers – members of the public or ‘consumers’ – for example a hairdressing salon includes VAT in the prices they charge members of the public
If you’re a VAT-registered business, in most cases you:
- charge VAT on the goods and services you provide
- reclaim the VAT you pay when you buy goods and services for your business
If you’re not VAT-registered then you can’t reclaim the VAT you pay when you purchase goods and services.
So in theory VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them.
If businesses do not follow the rules set out by HMRC they have now enforced heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.
Below we highlight some of the areas that you need to consider.
What is Input/Output VAT
Output VAT is collect from the customer (debtor) by the business on behalf of HMRC.
Input VAT what you pay on the goods and services you purchase.
So on your return you will deduct your input VAT from your output VAT to determine what is owed to HMRC or HMRC owes to you.
Please note that certain categories of input tax can never be reclaimed, such as that in respect of business entertainment and for most business cars.
What are taxable supplies?
Taxable supplies are mainly either standard rated (20%) or zero rated (0%).
There is in addition a reduced rate of 5% which applies to a small number of certain specific taxable supplies.
There are certain supplies that are not taxable and these are known as exempt supplies.
There is an important distinction between exempt and zero rated supplies.
The difference between exempt and zero-rated
If you sell zero-rated goods or services they count as taxable supplies, but you don’t add any VAT to your selling price because the VAT rate is 0 per cent.
If you sell goods or services that are exempt, you don’t charge any VAT and they’re not taxable supplies. This means that you won’t normally be able to reclaim any of the VAT on your expenses.
Generally you can’t register for VAT or reclaim the VAT on your purchases if you sell only exempt goods or services. If you sell some exempt goods or services you may not be able to reclaim the VAT on all of your purchases.
If you buy and sell only – or mainly – zero-rated goods or services you can apply to HMRC to be exempt from registering for VAT. This could make sense if you pay little or no VAT on your purchases.
Registration – is it necessary?
You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (currently £73,000).
If you are making supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies.
Taxable person
A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered, for the purpose of VAT registration a person includes:
- individuals
- partnerships
- companies, clubs and associations
- charities.
If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.
Administration/ Record keeping
Once you have registered you must make a quarterly* return to HMRC showing amounts of output/input tax to be accounted for. This must be completed within one* month of the end of the period it covers
*except for those on the Annual accounting scheme, please see below
It is important that a VAT registered business maintains complete and up to date records. This includes details of all supplies, purchases and expenses.
In addition a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. These records should be kept for a minimum of six years.
The maintenance of records and calculation of the liability is the responsibility of the registered person.
Inspection of records
HMRC from time to time will send out a VAT officer to inspect the business records, checking that the correct amount of VAT is being paid over. This is known as a control visit.
The VAT officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.
VAT Accounting Schemes
Please read out VAT Accounting Schemes blog, https://nicholsonandco.co.uk/wp/archives/718
Offences and penalties
HMRC have wide powers to penalize businesses who ignore or incorrectly apply the VAT regulations.
Penalties can be levied in respect of the following:
- late returns/payments
- late registration
- errors in returns.
How We Can Help?
We can help ensure that you comply with all the VAT regulations and assist you in a number of ways including the following:
- Tailoring your accounting systems to bring together the VAT information accurately and quickly for you;
- Ensuring that your business is VAT efficient and that adequate finance is available to meet your VAT liability on time;
- Providing assistance with the completion of VAT returns;
- Negotiating with HMRC if disagreements arise and in reaching settlements;
- Advising as to whether any of the available schemes may be appropriate for you.
Some of this information has been obtained from: http://www.hmrc.gov.uk/vat/start/introduction.htm#5, where more information can be found.
This is produced for information only and it is advisable to seek professional advice appropriate to your circumstances before taking any further action.