What is VAT?

Value Added Tax, or VAT, is a general consumption tax that is added to the sale price of almost all goods and services ('taxable supplies') sold to consumers of any kind. It is an indirect tax, which means that you collect it on behalf of the government and pay it to HMRC.

In the UK, the standard rate of VAT is 20%. This means that 20% of the sale value is added to the sale price at every point of the production process, from raw materials and labour to the sale of the final product to the end consumer.

A reduced rate (5%) or zero rate (0%) apply to some other supplies, and certain goods and services are VAT exempt or ‘outside the scope’ of VAT.

Do I need to register my company for VAT?

You must register your company for VAT if its VAT taxable turnover within a consecutive 12-month period is more than the VAT registration threshold of £85,000. Compulsory VAT registration also applies if:

  • you expect VAT taxable turnover to exceed £85,000 within the next 30 days
  • you buys goods for more than £85,000 from VAT registered suppliers in the EU, even if you only sell VAT exempt or 'out of scope' goods or services
  • neither you nor your company is based in the UK but you supply goods and services to the UK

Voluntary VAT registration is also an option. It is recommended if you expect your taxable turnover to be over the threshold in the current year. It can also offer a number of benefits to smaller businesses whose turnover is below the threshold.

Can I voluntarily register my company for VAT?

Voluntary VAT registration is an option for small businesses with turnover below the VAT registration threshold, or those who are unable to predict their potential turnover. This could be of great benefit, enabling you to reclaim VAT on purchases made by the company, avoid the risk of penalties if you were to suddenly go above the threshold, and prevent the need to adjust your prices at a later date.

What are the advantages of VAT registration?

The main advantages of VAT registration, whether it's compulsory or voluntary, are:

  • your company will receive a VAT registration number
  • your company can reclaim VAT on the goods and services it buys, including supplies, equipment, and machinery
  • you can backdate claims for VAT on purchases made up to 4 year before registration
  • it will improve the image and status of the company
  • many larger companies will only do business with other VAT-registered companies
  • potential to improve cashflow by charging VAT on sales and reclaiming VAT on purchases

Often, the benefits of VAT registration far outweigh the disadvantages, such as additional administration.

What goods and services are VAT exempt?

There are a number of supplies that are zero-rated, VAT exempt, or outside the scope of VAT. Some of the main categories of supplies under which these goods and services fall include food and drink for human consumption, land and buildings, insurance, financial services, children's clothing and footwear, and certain physical education and sports services.

After VAT registration, when should I start charging VAT on goods and services?

You must start charging VAT from your 'effective date of registration', which is determined by the period in which turnover exceeds or is expected to exceed the threshold. If your turnover for the last 12 months was more than £85,000, the effective date of registration is the first day of the second month after you exceeded the threshold.

However, if you expect to go over the threshold in the next 30-day period, you must start charging VAT immediately. In this instance, your effective date of registration is the date on which you realise you are going to exceed the threshold in the next 30 days.

How and when do I register for VAT?

You need to register for VAT within 30 days of exceeding, or expecting to exceed, the VAT threshold. If your turnover for the past 12 months was over the threshold, you must register for VAT within 30 days of the end of the month in which you exceeded the threshold. However, if you expect to go over the threshold in the next 30-day period, you must register before the end of that 30-day period.

You can register for VAT online or by post. Online is the simplest way, and you will be able to create a VAT online account at the same time, which you will use to file VAT Returns with HMRC. Within approximately 30 working days, you should receive your VAT registration certificate and number.

When are VAT Returns and VAT payments due?

VAT Returns are usually due every 3 months. This period of time is your company's 'accounting period' for VAT. Typically, the deadline for filing VAT Returns and paying VAT bills is 1 calendar month and 7 days after the end of each 3-month accounting period.

However, these deadlines are sometimes different. If you join the VAT Annual Accounting Scheme, for example, your VAT accounting period will be 12 months, with VAT Returns due only once per year, filed 2 months after the end of the accounting period. Throughout each accounting period, you will have to make advance payments towards your VAT bill on a monthly or quarterly basis, with a final payment made when you file the VAT Return.

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