Value Added Tax (VAT) is a tax that is paid to HM Revenue & Customs (HMRC) on the sale of goods and services in the UK. As a business owner in the UK, it is important to understand your legal obligations to pay VAT, whether you fall within the VAT threshold, how much VAT to charge and pay, and how to pay VAT to HMRC. In this article, we will explain exactly what is meant by VAT and how the VAT system in the UK works.
What is VAT?
VAT is a form of “consumption” tax that is added to the large majority of goods and services sold by VAT-registered businesses in the UK. The current standard rate of VAT in the UK is 20%. There is also a reduced rate of 5% payable on certain goods and services (e.g. children’s car seats and home energy) and a zero rate for items such as food and children’s clothes.
The reason that we refer to VAT as “value-added” is that it is levied on the price of products and services at each stage of each supply chain (i.e. sale of raw materials, manufacturing, and distribution). It is the end consumer that ultimately pays VAT, as any business involved in the supply chain can recover the VAT they pay.
Part 1 section 1 of the Value Added Tax Act 1994 states,
“Value-added tax shall be charged, in accordance with the provisions of this Act—
a)on the supply of goods or services in the United Kingdom (including anything treated as such a supply),
(c)on the importation of goods into the United Kingdom, and references in this Act to VAT are references to value-added tax.
(2)VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply”.
If your turnover exceeds the VAT threshold, you may be required to register for VAT
Do I need to register for VAT?
VAT is payable on the supply of goods or services or an import of goods for consideration made by a “taxable person” in the course of a business supplied in the UK.
Compulsory VAT registration
For the purposes of VAT, you will be considered a “taxable person” and hence must register for VAT if your VAT taxable turnover in the last 12 months exceeded £85,000. This is referred to as the “VAT threshold”. You must also register for VAT if you think that your VAT taxable turnover is likely to exceed £85,000 within the next 30 days.
The rules also state that you must register for VAT no matter your turnover if you are:
- Based outside the UK
- Your business is based outside the UK, and
- You supply goods or services to the UK (or you intend to start exporting to the UK in the next 30 days).
Voluntary VAT registration
If your turnover is less than £85,000, you can choose to register for VAT (voluntary registration). You may wish to do this because, as a VAT-registered entity, you can reclaim the VAT you pay in the course of doing business. It is important to bear in mind that as a VAT-registered business, you will have more administration to complete, including keeping records of your VAT transactions, collecting VAT, preparing and submitting your VAT return to HMRC, and paying VAT. The VAT administration process can be minimised, however, by using the cash accounting scheme. The cash accounting scheme allows you to work out how much to VAT to pay based on the payments received and made rather than the invoices issued and received.
Registering for VAT even if you do not meet the compulsory threshold may also give your business a more professional image and attract customers who are also VAT registered, allowing them to reclaim the VAT they pay.
Calculating your taxable turnover
When determining whether you meet the VAT threshold, you will need to add up the value of all non-VAT exempt products and services that you sell, including all:
- zero-rated goods
- goods you hired or loaned to customers
- business goods used for personal reasons
- goods bartered, part-exchanged or given as gifts
- services you received from businesses in other countries subject to a “reverse charge”
- building work over £100,000 your business did for itself
VAT-exempt goods and services (i.e. those you do not need to take into account when adding up your taxable turnover) include any of the following:
- financial services, investments and insurance
- garages, parking spaces and houseboat moorings
- property, land and buildings
- education and training
- healthcare and medical treatment
- funeral plans, burial or cremation services
- charity events
- gambling or lottery tickets
- sports activities
In addition, there are some goods and services that are considered “out of scope” when it comes to VAT; these include:
- goods or services purchased and used outside the UK
- statutory fees (e.g. congestion charges)
- goods sold as part of a hobby
- donations to a charity, if given without getting anything in return
Should I de-register for VAT?
If you have previously registered for VAT, you will need to cancel your VAT registration if you cease trading, you cease selling taxable goods or services, you join a VAT group, or your turnover falls below £83,000.
In some cases, it may be that your turnover exceeds the VAT temporarily. If so, HMRC advises that you write to them explaining why you will not exceed the VAT cancellation threshold of £83,000 in the next year. Based on the information you provide, HMRC may grant you an exception or refuse your request and require you to register for VAT.
How do I register for VAT?
The VAT registration process can be completed online on the HMRC website. Before registering, you will need your government gateway user ID and password. If you don’t already have a government gateway login, you can create one by clicking “Create sign-in details”. Once logged into the government gateway, you will need to follow the VAT registration process.
You may need to apply for VAT registration using the VAT1 paper form if you are applying for a “registration exception”, the “Agricultural Flat Rate Scheme”, or if you need separate VAT numbers for other divisions or business units of a body corporate under. In addition, you will need to use form VAT1A if you are an EU business “distance selling” to Northern Ireland, form VAT1B if you import goods into Northern Ireland worth over £85,000 from an EU country, or form VAT1C if you’re disposing of assets and have claimed “Directive refunds”.
Once you have completed the VAT registration process, HMRC will send you a 9-digit VAT number and a confirmation of your “effective date of registration”. Your new VAT number must be added to all invoices that you send to your customers going forward. HMRC will also explain how to make your first VAT return and payment. You can start charging and reclaiming VAT from your “effective date of registration”.
Most businesses prepare and submit a VAT return to HMRC on a quarterly basis (i.e. every 3 months). With the widespread use of online accounting systems, it is now standard practice for VAT returns to be sent to HMRC digitally using the “Making Tax Digital” service. You can also submit a VAT return through an agent or accountant or by using your VAT online account on the HMRC website.
VAT returns include:
- your total sales
- your total purchases
- how much VAT you owe
- how much VAT you are reclaiming
- the amount of VAT you’re owed from HM Revenue and Customs (HMRC)
How to pay your VAT bill
Your VAT payment must be received by HMRC no more than one month and 7 days after the end of the accounting period. For example, if the latest VAT accounting period runs from 1st October 2022 to 31st December 2022, you will need to pay your VAT by 7th February 2022. VAT can be paid using a variety of methods, including by direct debit, bank transfer, credit or debit card, or standard order. It is important to ensure that you pay early enough to allow the payment to be processed by the deadline.
While registering for VAT may increase the amount of administration you need to complete, it offers several advantages, including providing the ability to reclaim the VAT you pay, improving your professional image, and making your business more attractive to potential customers. If you are unsure if you need to register for VAT, the accounting methods to use, and how to prepare and submit your VAT returns, speak to your accountant or agent, who will be able to advise you further.
Uniwide Formations is a London-based professional business service provider with expertise in the registration and formation of limited companies and LLPs. Our specialist team can handle the process of setting up your company, registering for VAT, and meeting your reporting and filing requirements with Companies House and HMRC.