Value Added Tax, or ‘VAT’, is a tax based on the value of goods or services. As a ‘self-assessed’ tax, it is the responsibility of the taxpayer – the business owner – to ensure they are accounting for VAT correctly on all relevant transactions. A transaction is within the scope of UK VAT if it concerns a supply of goods or services made in the course or furtherance of business that takes place in the UK and is made by a taxable person (an individual or company who is registered for VAT).
Below, the experts in business tax at The VAT People outline what VAT is, the registration threshold, when you should register your business and how, the advantages to registering before hitting the threshold, the records you need to keep and how to submit them, as well as expert advice on tailoring your VAT compliancy to your clientele.
Managing your business’s VAT registration correctly
VAT is an important consideration for all businesses; mistakes can cost time and money to correct, so ensuring you are acting in accordance with your obligations from the outset is crucial. In the event errors are made, these may be subject to a VAT penalty regime which runs from 0% to 100% depending on the nature of the error, although showing that reasonable care has been taken to get VAT right reduces potential penalties.
When should I register my business for VAT?
Should the value of a business’s taxable supplies exceed the value of £85,000 in a rolling 12-month period, or in the next 30 days alone, the business will be required to register and account for VAT on taxable supplies. Registration can be sought via an online application, or by submitting a VAT1 form.
What are the VAT rates I should know?
There are currently 3 VAT rates in effect in the UK;
- The standard rate of VAT (20%)
- The reduced rate (5%)
- The zero-rate (0%)
Supplies can also be classified as exempt from VAT – the value of exempt goods/services are excluded when calculating whether a business has exceeded the VAT registration threshold. If a supply cannot be defined as being liable to the reduced or zero rate, or being exempt, it is by default a standard-rated supply. Zero-rated supplies are still considered a taxable supply and should the value of zero-rated supplies made exceed the relevant threshold, VAT registration will be required.
A VAT 1 form can be found on the government website; VAT1 Application for registration. VAT registration can also be applied for online – for example, we at The VAT People are able to apply on behalf of clients via our agent’s government gateway, or a client can apply online themselves by creating a government gateway account – more information regarding this can again be found on the government website, at How to register for VAT.
The VAT liability of supplies is outlined in three schedules of the VAT Act 1994, which are:
- Schedule 9 – exempt supplies Value Added Tax Act 1994
- Schedule 8 – zero-rated supplies Value Added Tax Act 1994
- Schedule 7A – reduced-rated supplies Value Added Tax Act 1994
There is no list of standard-rated supplies as this is by exception. As such, if a supply of goods or services is not shown within the above schedules it will likely be subject to the standard rate.
The VAT due on a business’s supply of goods or services is known as its output tax. Conversely, VAT incurred on purchases is classified as input tax and is recoverable to the extent that it is incurred in the course of making onward taxable supplies. As such, input tax relating to the provision of exempt supplies is irrecoverable (as this is not considered a taxable supply for VAT purposes).
How do I submit my business’s VAT returns?
VAT-registered businesses are required to submit quarterly VAT returns (although these can be submitted monthly in certain circumstances) to report the output VAT (VAT on sales) charged during the relevant period. This is offset against input tax (VAT on purchases) incurred within the same period and in instances where input tax exceeds output tax (for example where sales made are primarily zero-rated), the difference is paid to the taxpayer by HMRC. Where a VAT return is submitted late or payment of VAT is made late, the trader may be liable to a default surcharge.
Should I voluntarily register my business for VAT?
A business trading below the VAT registration threshold may voluntarily register. The main benefit to doing so would be to recover input tax incurred, although output tax must be accounted for in the normal way. Therefore, consideration should be given to the commercial implications of doing this, particularly where customers and not VAT registered (i.e., consumers), and this additional VAT element will represent an irrecoverable cost.
In terms of record keeping, a registered person must provide their customer with a VAT invoice within 30 days of the tax point of the supply (this is the date a supply is made for VAT purposes) and should contain the following information;
- Invoice number;
- Date of supply;
- Date invoice issued;
- Supplier’s name, address and registration number;
- Recipient’s name and address;
- Description and quantity of goods/services;
- Amount being charged;
- Rate of VAT applicable;
- Total amount being charged;
- Rate of discount, if offered
- Copies of sales invoices issued by the business should be held within their records.
Furthermore, purchase invoices (showing the above information) should be retained, particularly where a claim for input tax is being made via a VAT return. If the business does not hold a corresponding purchase invoice, it is unable to claim input tax incurred.
My clients are based outside of the UK; does this matter?
The sale of goods/services to customers located outside the UK is subject to a different VAT treatment depending on the location of the customer, the type of supply and its value. This can be a complex area to navigate and therefore, should supplies be made outside the UK, please seek further advice to ensure VAT is accounted for correctly.
The VAT People is a VAT consultancy firm that works with a wide range of businesses in providing comprehensive advice on thorny VAT issues across all sectors and we are well-known and highly regarded by the profession. We have helped countless businesses of all sizes, in all industries, remain VAT compliant and strategise ways to optimise their VAT processes.
