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DEFINITIONS
What is VAT?
What is turnover?
What is taxable turnover? What are input tax and output tax?
RATES What are the VAT rates?
Do these rates apply to all goods and services?
What if all my goods are zero-rated?
What are the exempt supplies?
VAT REGISTRATION
When must I register and start charging VAT?
How do I register for VAT?
What happens after I've registered?
Why would I want to register for VAT if my taxable turnover is below the threshold?
ADDITIONAL
Is there anything that will make VAT simpler for small businesses?
Where can I find more detailed information?
DEFINITIONS
What is VAT?
Value added tax (VAT) is a sales tax levied on business transactions. It is charged on the sale of most goods and services in the UK, imports from inside and outside the European Union as well as on acquisitions (explained below in Table A).
What is turnover?
Turnover or sales revenue is the (total) amount of money generated by your business, not just the profit.
What is taxable turnover?
Taxable turnover includes all supplies and goods on which a VAT rate is specified.
What are input tax and output tax?
Input tax is VAT charged by suppliers to your business. Output tax is the VAT you charge to your customers. The amount owed to HMRC (HM Revenue and Customs) is the difference between your output tax and input tax.
For example, goods are supplied by a wholesaler to the retailer who sells them to the consumer. If you are the retailer in this supply chain, then:
Wholesale price of goods + Input Tax = Cost price of item for retailer
(Selling price for retailer= cost price of item + Profit)
(Output Tax = Cost price + 17.5% of cost price, standard VAT rate is 17.5%)
Selling price for retailer + Output tax = Retail price paid by consumer
Amount owed as VAT by retailer = Output Tax - Input Tax
If input tax is more than output tax, you may qualify for a refund.
RATES
What are the VAT rates?
There are three categories of VAT, which are explained as follows:
|
Rate Type |
Rate Value |
Applicable supplies |
Standard |
17.5% |
Most goods and services |
Reduced |
5% |
Domestic fuel or power, energy saving materials installation, residential conversions, children car seats, women's sanitary products etc. |
Zero |
0% |
Goods and services on which VAT is not being charged. Examples are: most food (but not meals in restaurants/ cafes), books, newspapers, young children's clothing and shoes, exported goods, prescriptions, most public transport services etc. |
Do these rates apply to all goods and services?
No. Some supplies are exempt from VAT, which means that no VAT is payable. Also supplies are outside the scope of VAT if they are:
o made outside the UK and Isle of Man;
o not made in the course of business.
What if all my goods are zero-rated?
If all your supplies are zero rated, you may not need to register for VAT.
What are the exempt supplies?
Exempt supplies are those on which no VAT is payable, as no VAT rate is specified. Supplies are also outside the scope of VAT if they are:
- made outside the UK;
- part of a non business activity.
Examples include:
- selling, leasing and letting land and buildings (but not lettings of garages, parking spaces or hotel and holiday accommodation);
- insurance;
- betting, gambling and lotteries (but not takings from fruit machines);
- providing credit;
- certain education and training;
- fund raising events by charities;
- subscriptions to certain membership organizations;
- the services of doctors and dentists;
- certain services from undertakers.
If all your supplies are exempt, you normally cannot register for VAT. If you are registered for VAT and have some exempt supplies (partial exemption) you may not be able to get all your input tax back.
VAT REGISTRATION
When must I register and start charging VAT?
You can run your business without registering for VAT, but you will need to register if
- you want to charge VAT from your customers;
- your taxable turnover exceeds the VAT threshold.
Table A defines the three factors which form a part of your taxable turnover.
|
Table A |
Factor |
Definition |
Taxable Supplies |
Supplies of goods and services made in the UK. |
Distance Sales |
A taxable person in one European Community (EC) Member State supplies goods to a customer in another EC Member State (the customer is not registered for VAT or liable to be registered for VAT). |
Acquisitions |
If you are an organization, the goods you buy from a VAT registered supplier in another EC country for removal to the UK are known as acquisitions. |
Table B discusses situations related to different amounts of taxable turnover.
|
Table B
|
|
Taxable Turnover |
Recommended Action |
|
Less than £64,000 |
VAT registration is not compulsory but you can voluntarily register to reclaim VAT on purchases. After registration you will have to account for tax on your sales, where applicable. |
|
About to exceed £64,000 |
You must notify your HM Revenue and Customs
local VAT office immediately of liability
to register for VAT. |
Exceeded £64,000 |
If you have not registered yet, you must do so. You may be liable for a default surcharge depending on your situation. |
How do I register for VAT?
VAT is paid to HMRC, To register for VAT; you
must complete Form VAT 1, which you must send
to HM Revenue and Customs. within 30 days of becoming
applicable for VAT. You may also need to complete
the following forms:
- VAT 2 - if your business is a partnership
- VAT 68 - if you are buying an existing business and you wish to keep the previous owner's VAT registration number
- VAT 1TR if you are appointing a tax representative.
Click here for hassle free online VAT registration through VAT Centre.
What happens after I've registered?
After registering for VAT, you need to charge VAT on all your taxable supplies. Moreover, you should keep records of the following:
- all standard-rated goods and services which are a part of your business;
- a separate record of any exempt supplies you make;
- the VAT account: a summary of the totals of your input and output tax.
Additionally, you will need to fill in a VAT return at specified intervals. You can do this online or use a paper return. If the VAT on your purchases is more than the VAT on your sales you can claim the difference from HMRC.
Why would I want to register for VAT if my taxable turnover is below the threshold?
VAT registration is not compulsory but you can voluntarily register to reclaim VAT on purchases. After registration you will have to account for the tax on your sales, where applicable.
There are certain advantages as well as disadvantages attached to voluntary registration. Benefits include:
- increased credibility for your business;
- if your business makes standard or zero-rated supplies, the ability to claim back the input tax.
However, once registered for VAT, you will have to:
- account for output tax on all your taxable supplies;
- keep proper VAT records and accounts;
- file VAT returns regularly.
ADDITIONAL
Is there anything that will make VAT simpler for small businesses?
There are a number of simplified arrangements to make VAT accounting easier for small businesses. HMRC lists the following 5 methods to make VAT payment process simpler for small business owners:
- Cash accounting
If your taxable turnover is under £660,000 a year you can account to Customs for VAT on the basis of cash received and paid, rather than the invoice date or time of supply.
- Annual accounting
Most businesses work on quarterly VAT periods and send in four VAT returns every year. However, if your turnover is under £660,000 you can join the annual accounting scheme and send in just one return a year.
If you use the scheme you do have to make regular payments throughout the year. This can help financial planning and cash flow.
- Retail schemes
If you are a retailer, there are alternatives to issuing invoices for a large number of supplies direct to the public.
- Bad debt relief
- If you make supplies of goods or services to a customer but you are not paid you may be able to claim relief from VAT on the debts.
- Flat rate scheme
You are likely to be eligible for the flat rate scheme if your turnover is under £150,000. This scheme lets you save on administration because you don't have to account internally for VAT on each individual "in and out". You just pay over a set percentage of your total turnover. The rate depends on your business type.
Where can I find more detailed information?
You can refer to the following documents present in the HMRC website:
The VAT Guide: Notice 700 tells you more about what you should and shouldn't charge VAT on.
Should I be registered for VAT?: Notice 700/1 defines in detail, who should register for VAT and shows you how to fill in form VAT 1.
Filling in your VAT return: Notice 700/12 provides helpful hints on completing your VAT return.
The Ins and Outs of VAT: Notice 700/15 gives a simple introduction to output and input tax.
Keeping Records and Accounts: Notice 700/21 explains what records you will need to keep.
How to correct errors and make adjustments: Notice 700/45
Default Surcharge: Notice 700/50
Retail schemes: Notice 727
Cash Accounting Scheme: Notice 731
Annual Accounting Scheme: Notice 732
Flat rate scheme for small businesses: Notice 733
Catalogue of Publications:
Notice
999 provides a list of all the
current publications issued by HM Revenues and
Customs.
Can I speak to someone for more help?
Please contact VAT Centre support personnel at the following phone numbers:
English
44-207-016-2727
44-207-255-2557
German
44-207-016-2726
French
44-207-612-4146
Russian
44-207-637-3883
Italian
44-207-612-4999
You can also send an email at info@formationshouse.com |
