Value Added Tax (VAT) came into force in 1973, and started off at a simple 10% on nearly all goods bought from a business.
Since then it has swollen in size, now at a rate of 20%, and complexity.
The complex nature of VAT has resulted in two famous battles over Jaffa Cakes and marshmallow covered teacakes.
HMRC initially believed that these items were both chocolate covered snacks, however legal teams successfully argued that they were both actually cakes – therefore zero rated for VAT purposes.
So a good understanding of the basics for your particular business is a must!
As always, the responsibility lies with the business when it comes to their tax responsibilities.
The first point to consider when it comes to VAT is registration.
You MUST register for VAT if your business turnover is more than £83,000 over a 12 month consecutive period.
However, you can also voluntarily register if your turnover is below that level.
Why voluntarily register I can hear you ask?
Well some business e.g. a butchers shop, are not required to charge VAT on their sales of meat products, therefore are in a position to make a claim for the VAT incurred on their overheads.
Do consider your customer base before voluntarily registering.
If the bulk of your customers are VAT registered then it will make no difference to them as they can claim a credit for the VAT you charge then on their VAT return.
However, if most of your sales are to the public you are effectively just putting your price up by 20%.
It may be more than people can afford, and may price you out of the market!
Another reason you may be obliged to register is if you take over an existing business that is already VAT registered. The rules in this area can be quite complex, so do get professional help on this one!
Upon registration, you will be issued with a VAT number and will be required to submit quarterly VAT Returns. VAT is either paid or refunded on submission of the VAT Return.
Penalties will be levied for late registration as well as for late submission or payment of quarterly VAT. So as always good planning is key.
Once you are registered for VAT you must charge VAT on your sales. So, if you sold an item at £100 before being VAT registered, the selling price of this item will change to £120 after you are registered i.e. £100 + vat at 20%.
However, you can also claim a credit against the vat you charged by reclaiming VAT paid on any business-related goods or services e.g. rent/phone/heat and business purchases of stock etc.
This is why people often refer to vat registered business as mini tax collectors! Basically, as a vat registered business you charge VAT, collect it in, and pay it over to HMRC after deducting any VAT you have incurred.
It would be much easier for all involved if there was one rate of VAT across the board, or indeed no VAT at all!! However there are a number of rates. I have outlined the basics below, but do consider the specific rules and rates for your trade.
20% standard rate – this is pretty much the default rate that is charged on most goods and services in the UK unless they are specifically identified as being reduced or zero rated.
5% Reduced rate – this applies to domestic fuel and power, installation of energy saving materials and also some building conversions. Other items in this category include sanitary hygiene products and children’s car seats etc.
0% Zero rate – this rate applies to basic foods, however not meals in a restaurant or hot take aways. Also books/newspaper, children’s clothes and shoes, and public transport, to name a few.
Exempt – exempt items must NOT have VAT charged on them, these items include insurance, fundraising, the provision of credit, education etc.
Outside the scope – other items fall completely outside the scope of the UK VAT system e..g wages, rates, MOT tests etc.
It is impossible to provide a complete list in this space however further information can be found at www.hmrc.go.uk
There are also may schemes available to businesses which can help in both the preparation of VAT and also the cash flow in terms of keeping up to date with liabilities.
Dealing with businesses every day, I am all too aware of the impact that VAT can have particularly when it has not been properly provided for. My advice to clients is to have a separate VAT bank account and transfer the vat element of their sales across daily or weekly. Planning ahead means you are not caught short when the quarterly VAT Return becomes due.
In the next article I will review the schemes available and how they can help your business.
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