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Category: VAT
VAT and when you need to register
VAT in the UK
Are you a small business unsure about the legislative requirements of VAT and when you need to register? To ensure compliance with current UK VAT legislation, all small business owners need to understand the implications of VAT or value-added tax for their business. Business owners should be familiar with input and output tax, the scope of VAT and when a business must register for VAT.
VAT in the UK is a tax on goods and services sold in the United Kingdom. It is a tax paid by the consumer and is currently charged at 20%. Some goods and services are exempt from VAT or are subject to a lower VAT rate. The current threshold for VAT registration is an annual business turnover of £90,000.
Input and output tax
When a VAT registered business makes a taxable supply, it must charge VAT to its customers, which is output tax. The business can reclaim VAT that it has paid on its purchases, such as the VAT on goods purchased from other businesses. This is known as input tax.
The difference between the output tax and input tax is the amount of VAT the business owes to HM Revenue and Customs (HMRC). If the output tax exceeds the input tax, the business must pay the difference to HMRC. If the input tax is greater than the output tax, the business can reclaim the difference from HMRC.
Scope of VAT
UK VAT consists of taxable supplies and exempt supplies. Taxable supplies are subject to VAT at three rates, 20%, 5% and 0%. Exempt supplies are not taxable supplies. Businesses with exempt supplies are unable to register for VAT. They do not charge VAT on their outputs and can’t reclaim VAT on inputs or purchases.
Standard rated VAT supplies
These are supplies that are subject to the standard rate of VAT of 20%.
Reduced rated VAT supplies
These are supplies subject to a lower rate of VAT, which is currently 5%, for example, home energy.
Zero rate VAT supplies
These are supplies with a 0% VAT rate, such as books, children’s clothes and non-luxury food.
Exempt supplies
These are supplies not subject to VAT such as postage stamps, and education.
Outside the scope of VAT
Certain supplies, such as wages, are outside the scope of VAT.
Calculating VAT
The amount of VAT due on a taxable supply is calculated by multiplying the price of the supply by the VAT rate. For example, if a business sells a product for £100 and the standard rate of VAT is 20%, the VAT owing is £20.
Registering for VAT
Businesses with a taxable turnover exceeding £90,000 per year must register for VAT. Businesses with a taxable turnover of less than £90,000 per year may voluntarily register for VAT.
Once a business is VAT registered, it must charge VAT on all its taxable supplies. It must also keep records of its VAT transactions and submit VAT returns to HMRC every quarter.
To learn more about how VAT is calculated and the different VAT schemes that are available to small businesses, click below:
