Company formations

What Is VAT?

What Value Added Tax (VAT) means to you and your business depends on whether or not you are registered for VAT. VAT is charged on the vast majority of business transactions in the UK, and is added when businesses provide goods and/or services to other businesses, and consumers.

VAT Registration

There is no requirement to register for VAT if your business’s turnover is less than £68,000 (for 2009/2010). This figure, known as the ‘threshold’ generally increases by approximately £1000 each year. You can register for VAT if your turnover is less than this, and indeed for businesses that make considerable purchases from large suppliers (which means that they pay VAT on them) it may be a necessity.  

If you provide goods and services that are VAT taxable, and you are VAT registered, it is a legal requirement to charge VAT on the full sale price of the items or services you are supplying. This is the case regardless of whether you accept money payment, or part exchange for other goods – you will still have to charge VAT.  

It is important to note that if your business is not registered for VAT because you are below the threshold, you will still have to pay ‘input tax’ on goods and services that you buy in connection with your business. However you will not be able to charge output tax on any of your sales.

Input and Output Tax

VAT is divided into two distinct categories. When you charge VAT on your sales, this is known as ‘output tax.’ When you pay others VAT on goods and services, this is called ‘input tax.’ If you have received more output tax than you have paid input tax, you will have to send the difference to HM Revenue and Customs (HMRC) when you file your VAT return (which is most often a quarterly exercise, unless you are on an annual scheme or have another arrangement.) If, on the other hand, you have paid out more ‘input tax’ than you have charged on your sales, HMRC will owe you a VAT repayment.

Rates of VAT

There are several rates of VAT, the most common of which is the standard rate. This is currently back at 17.5%, after it was notoriously cut by the government in late 2008 to try to boost the economy. Some goods and services have a reduced VAT rate, such as gas and electricity for homes, childrens car seats and sanitary hygiene products, amongst others.

There are also some goods and services that are charged at 0% VAT. Whilst this may seem not to make any sense, the reason for this rate is this: selling goods or services that are zero-rated means that they are taxable supplies, so that you are still able to claim back VAT on your expenses. If your business is exempt from VAT, you are not generally allowed to register for VAT or reclaim VAT on your purchases.

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