How VAT works in the UK

Value Added Tax is a final consumption tax that is payable on the majority of goods and services in the UK. Although it is called a ‘final’ consumption tax, the reality is that most goods and services are taxed at every stage. If you run a business that has a turnover of more than £68,000 per year, you must register for VAT.

Registering for VAT

If your turnover is less than this you are still entitled to register for VAT, as there may be some benefits to your business in doing so. If in doubt, contact your accountant or financial advisor for more details. It is important to note that you cannot charge or claim VAT unless you are VAT registered: if you are starting up in business, and have not registered for VAT, your invoices will not reflect VAT and your customers/clients will not pay it to you.

VAT Liability

VAT is divided into two types: ‘input tax’ and ‘output tax.’ A business will be liable to pay VAT on all its purchases (input tax) and will charge VAT on all its sales (output tax.) The current standard rate of VAT is 17.5%.

Some businesses have a rate of 0% VAT, which means that although they are VAT registered, they do not charge VAT on top of their prices. Examples are foodstuffs, other than those sold in restaurants or takeaways, newspapers, books, children’s clothes and public transport.

Other types of goods and services are exempt from VAT, such as insurance, most doctor and dentist healthcare services, certain types of education, fund raising, and membership subscriptions.

VAT Returns

Most businesses operate a quarterly scheme in which HMRC send them a green form to fill in (or get their accountants to do it) which shows how much VAT they have received and paid out. When this green form is submitted, the business pays any VAT owed to HMRC, or claims a rebate, whichever is applicable. It is also possible to go onto an annual accounting scheme, in which you only submit one return per year.

VAT Schemes

Some types of businesses may benefit from, a flat rate scheme. To be eligible, your turnover must be less than £150,000. This means that you charge VAT at the standard rate but pay a reduced rate to HM Customs, instead of reclaiming anything from input tax purchases. Not only does this save time, because you do not have to calculate the amount of VAT that you have paid in each quarter, but you could also save money if the amount of VAT on purchases you make does not exceed the amount you save. If you register for the flat rate scheme during the first year that you are VAT registered, then you are entitled to a 1% discount. Otherwise, actual percentages depend on turnover and your type of business.

Click Here to register your own company today.
The process is quick, easy and simple.