Value Added Tax (VAT)

About Value Added Tax (VAT)

Value Added Tax, known as VAT is a tax that people pay when they buy goods or services. A percentage is added to the cost, the standard rate is currently 20% and around half of goods and services the average household buys are subject to VAT at standard rate. There are other rates or exemptions that apply and if you are registered for VAT you should ensure that you understand when and how these apply.

A business must register for VAT when they reach the VAT threshold but may register voluntarily if they chose. This will largely be determined by your business type and customer or client. Some commercial customers may require you to be VAT registered due to the checks that are undertaken by HMRC at the time of application. VAT registration may also impact the perception that others have of your business.

When referring to costs with or without VAT we refer to the net cost as without VAT or VAT exclusive and the cost that includes VAT as the VAT inclusive cost or gross cost

If your business is not registered for VAT then you neither charge VAT to your customers nor reclaim any VAT that you spend. Your expenditure will be the full gross cost

If you are registered for VAT you will add VAT onto the cost that you charge your customers but the VAT amount will be excluded from your income as it will be paid to HMRC. On your business expenditure, the net cost will be your expenditure for tax purposes. At regular intervals, often quarterly, you will submit a VAT return to HMRC to report how much VAT you have collected in your sales and how much VAT you have paid on your allowable expenditure, the difference you must then pay to HMRC. If you have paid more than you have collected then HMRC will issue a refund. If you are using MTD software to keep your accounts, your software will calculate your return for you; it is important though for you to have an understanding to be able to identify any mistakes which may occur from incorrect entries in your accounts.

If you need or decide to register for VAT there are several schemes that may help your business operations. You should ensure that you are familiar with the rates of VAT for items or services that you sell as well as any specific requirements for your industry.

When charging or reclaiming VAT it is important to understand what paperwork is required and what a VAT invoice is and what information it contains

If your business is registered for VAT then you should read VAT Notice 700 to ensure a good understanding of the basic rules and procedures that apply