Value Added Tax (VAT) is charged on most goods and services that VAT-registered businesses provide. As a VAT-registered trader you charge VAT on the goods and services you provide, and reclaim the VAT you pay when you buy goods and services for your business.
You will submit a VAT Return at regular intervals, usually quarterly. The return shows the VAT you've charged on your sales to your clients in the period, known as output tax, and the VAT you've paid on your purchases, your input tax.
If the amount of output tax is more than the input tax, you send the difference to HMRC with your return.
If the input tax is more than your output tax you claim the difference back from HMRC.
Different types of Supplies
There are different VAT rates depending on the goods or services that are being provided; standard rate 20%, reduced rate 5% and zero rate 0%. The standard rate of VAT is the default rate that's charged on most goods and services unless they're specifically identified as being reduced or zero-rated.
Some services are exempt for VAT purposes and no VAT is charged -if all of the goods and services you sell are exempt, your business is exempt and you won’t be able to register for VAT. This means you can’t reclaim any VAT on your business purchases or expenses. This is in contrast to where you sell or otherwise supply zero-rated goods or services. Here you can reclaim the VAT on any purchases that relate to those sales.
Examples of reduced-rated items would be domestic fuel and power. Zero-rated items include books and children's clothes and public transport. Some of the work performed by companies in the financial, insurance, healthcare and education sectors is exempt from VAT.
Registering for VAT
If the goods or services, your business provides count as 'taxable supplies’ you must register for VAT if either:
Your turnover for the previous 12 months has gone over a specific limit; the 'VAT threshold' (£83,000 from 1st April 2016).
- You think your turnover will soon go over this limit in the next 30 days.
A business may make taxable and/or exempt sales for VAT purposes. It is only the taxable sales i.e. standard rate and zero rated sales that are relevant in considering whether a business has a requirement to register for VAT.
You can choose to register for VAT voluntarily if you wish, even if you are below the threshold.
Reasons to register if you are below the VAT threshold
‘Voluntary registration’ is the term given to becoming VAT registered even though your turnover is below the registration threshold. If your company makes all, or the overwhelming majority, of sales to VAT-registered businesses, registering VAT makes sense because you will be able to reclaim VAT on any business expenses you incur.
You should consider your customer base though. A company registered for VAT must charge VAT on its invoices at the appropriate rate, currently 20%. If you deal mainly with businesses that cannot recover VAT, then it will be a real cost to your customers and impact on pricing your services/supplies.
Once your business is VAT registered you can typically reclaim VAT incurred on goods or services used in the course of your business; for example, the VAT on Brookston’s fees and on expenses can be reclaimed. As your business only pays HMRC the net of the VAT charged on its supplies, less the VAT incurred on goods or services purchased, in most cases you will be better off.
Accounting schemes to simplify your VAT
There are special schemes that some companies can use to simplify the VAT Return process - helping to work out and minimise the financial impact of VAT on the company. Two examples are the Cash Accounting Scheme and the Flat Rate Scheme for VAT.
The Cash Accounting Scheme means you only pay the VAT to HMRC when the cash is received, rather than when you raise an invoice. This can delay the VAT due and also ensures you only pay VAT on sales invoices that have been paid.
The Flat Rate Scheme for VAT determines your VAT liability based on a percentage of your business turnover. This is a scheme for small businesses to simplify their administration. It allows companies to pay a lower level of VAT in return for not claiming VAT back on their expenses. If this works for you, it can represent a substantial saving. For this reason, please read our section on the Flat Rate Scheme for VAT for more detailed consideration.
Submitting your VAT Return and paying your VAT
Virtually all VAT-registered businesses must submit their VAT Returns online and pay any VAT due electronically. Before you can submit your returns, you must have registered and enrolled for the VAT online service. Once this is done you'll be able to submit your returns straightaway.
Once you have submitted your VAT Return to HMRC you will get an on-screen unique submission receipt reference number. It's a good idea to save or print a copy of this on-screen confirmation. A copy of every VAT Return your company submits online will be saved on your VAT online services account for a period of 15 months.
You can use an accountant such as Brookson to submit your returns online. Before they can act for you they will have to be signed up to use HMRC Online Services, enrol for the VAT for agent’s online service and set up authorisation to act on your behalf.
Your business will then receive a letter containing a unique Authorisation Code and asking you to confirm the request. This code should be passed immediately to your accountant. They must activate this online within 30 days.