Category: VAT

What is the threshold to register your business for VAT

You must register with HMRC for VAT if your business turnover or sales have exceeded the VAT registration threshold of £90,000 in the last 12 months or you predict they will do so in the next 30 days. Under Making Tax Digital (MTD), HMRC requires VAT registered businesses to submit their quarterly VAT returns electronically. You’ll need MTD compliant accounting software to do this. The current VAT rate is 20%.

VAT types and rates

Input VAT

One of the benefits of a VAT registered business is the ability to reclaim the VAT on purchases made for running the business. VAT on purchases is termed input VAT, and a business declares and reclaims this on the VAT return.

Output VAT

A VAT registered business must charge VAT on the sale of goods and services, which is termed output VAT. The business declares and pays this tax to HMRC on the VAT return. Typically, the business deducts input VAT from output VAT and pays the balance to HMRC. Sometimes a business finds itself in a repayment position, when input VAT exceeds output VAT. This may occur if a business has cyclical sales and experiences periods where production input is high and sales are low. When HMRC owes a business VAT, they will reimburse the VAT to the business.

The following is a simple example of how VAT works:

• The cost of raw materials is £100 plus VAT of £20, making a total of £120
• Using the raw materials, a product is created which sells for £200 plus £40 VAT, and the customer pays a total of £240 for the item
• On the VAT return the output VAT is £40 and the input VAT £20.
• The input VAT of £20 is deducted from the output VAT of £20, leaving VAT of £20 owing to HMRC.

VAT rates

There are a number of different VAT percentage rates that apply to different goods and services. There is the standard VAT rate of 20%, a reduced rate of 5% and a zero rate. Exempt goods and services, and items outside the scope of VAT, do not incur VAT.

VAT Schemes

There are a number of VAT schemes that businesses can opt to use to help them manage their cash flow, administration etc. The most popular schemes for small businesses are the following:

Other resources:

VAT rates on different goods and services – GOV.UK

How VAT works: VAT schemes – GOV.UK

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: