A Beginner’s Guide to VAT for UK Businesses

VAT. Don’t let it be a headache. We’ve got a plain English guide to VAT for UK businesses.

A lot of people who are either just starting their business, or have been a business owner for a few years may have a rough idea of what VAT is. Today, you will learn more information and details about VAT, from how you register to the pros and cons of being VAT registered.

What Is VAT?

VAT (Value Added Tax) is a tax which is applied to pretty much all goods and services in and around the UK. Wherever a product or service is sold, the customer will pay a standard rate tax (usually 20%) at the point they purchase.

 

Whether you’re an individual or a business, you’ll still pay VAT when you buy goods or services. However, VAT is not charged or reduced to 5% on multiple services and products, such as certain leisure and welfare services and children’s car seats.

How Do I Register For VAT?

The majority of businesses can register for VAT online on the GOV website.. To do this you’ll need to create a VAT online account (also known as a ‘Government Gateway Account’). You will need this to submit your VAT Returns to HM Revenue and Customs (HMRC).

 

You can also hire an accountant or agent to submit your VAT Returns to HMRC on your behalf.

 

If for any reason you cannot register online, you may be able to register using a VAT1 paper form.

 

Once registered, you will get a VAT registration certificate sent to you within 30 days (However, this may take longer). This certificate will be sent to either your VAT online account or by post (but only if you get registered by an accountant/agent or you can’t register online).

 

You will need to provide details, such as your bank details, turnover and business activity.

 

You’ll have to pay HMRC any VAT due from your ‘effective date of registration (your registration date).

 

Also, as of now, if your business is eligible to register for VAT, you will also have to follow the Making Tax Digital rules which involves keeping digital records and using software to submit your VAT returns.

How Do I Calculate VAT On My Goods Or Services?

To calculate VAT on the price of your product or service, you will need to multiply the price excluding VAT by 1.2. If your product or service only needs to have 5% VAT included, you will multiply the price excluding VAT by 1.05.

 

There are a range of online VAT calculators available too which let you set the VAT percentage and will work out everything for you.

How Is VAT Charged?

VAT is commonly charged by businesses on products or services at the point of sale. Due to it being a consumption tax, it is paid by the end customer rather than the actual business selling the items or services.

When Do I Have To Register For VAT?

You need to register for VAT if you expect your VAT taxable turnover to reach that threshold within the next 30 days OR if your business has had a VAT taxable turnover of £85,000 or over in the past 12 months.

 

If you do expect your VAT taxable turnover to reach the £85,000 threshold in the next 30 days, you need to register by the end of the 30-day period. The date that this comes into effect is the date you REALISED, not the date your turnover went over the threshold.

 

For example, if you realise on 1st July that within 30 days your turnover will go over the £85,000 threshold, you need to register by 30th July. However, your effective date of registration is 1st July.

 

If your business has exceeded the threshold within the past 12 months, you will need to register within 30 days of the end of the month when your business went over the threshold. Your effective date of registration will be the first day of the second month after you’ve gone over the threshold.

 

For example, between 18th February 2020 and 17th February 2021 your VAT taxable turnover was £200,000.This is the first time it has gone over the threshold to register. You need to register by the 30th March 2021. However, your effective date of registration will be 1st April 2021.

What Are The Pros And Cons Of Being VAT Registered?

Pros

 

  • Your potential and current customers or clients may think even more highly of your business as it seems more professional and established.

  • It may be an indicator that your business is expanding vastly.

  • You can very often reclaim the VAT claimed on items or services that you purchased for your business to use.

 

Cons

 

  • You will have to increase your prices which in turn could push away certain customers from buying your goods or services.

  • There is a lot more paperwork to do as you’ll have to send your VAT Returns to HMRC quarterly.

  • You may owe HMRC money if your output tax is more than your input tax.

If I'm A Sole Trader, Do I Have To Register For VAT?

If you are a sole trader, it is still compulsory to register for VAT if you reach the £85,000 VAT taxable turnover threshold. You will also need to abide by the Making Tax Digital as mentioned earlier in this article.

What Items, Goods and Services Are Exempt From VAT?

There are a few products and services that are either reduced or exempt from VAT. These things include:

  • Education and training services
  • Subscriptions to memberships
  • Selling, letting and leasing commercial buildings or land – however, this exemption can be waived.
 
As a business, you will not need to include sales of exempt goods or services in your taxable turnover for VAT.

How Can I Check If A Business Is VAT Registered?

If you or a customer would like to check if a business is VAT registered, the main way to do so is to ring the HMRC VAT Helpline (0300 200 3700) which is open between 8am and 6pm Monday to Friday.

What Happens If I Do Not Register For VAT?

If you do not register for VAT at the time you are supposed to, HMRC would still expect you to pay the VAT which should have been charged. You may also receive a Late to Registration penalty which will increase over time if you continue to not register for VAT.

All in all, learning about VAT can be a daunting thing to begin with, but hopefully this has given you more understanding as to what VAT is, among other things. One key website to have a quick read through is the GOV website by clicking here.

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