VAT is familiar to most people; at the very least, it isn’t lost on us as consumers that VAT raises the cost of our purchases. Business owners, though, it is good practice to know a lot more about VAT, because properly handling VAT is one of the most important methods to verify that your company is operating lawfully.
If you’re starting a new business, you’ll need to know everything there is about VAT. This article will help you understand what VAT is, how to calculate it, and what your responsibilities as a business owner are.
What exactly is VAT?
The VAT, or value added tax, is a tax that is added to the price of products and services. It was first introduced to the United Kingdom in 1973. The following are some of the areas that VAT is added to, The sale of a product or service, including exchanges, hiring or loaning of goods, business asset sales and commission.
However, not all products or services are affect by VAT, as some are either exempt from VAT or fall outside of its scope. Healthcare, education, insurance, and stamps, for example, are exempt from VAT, as are charitable donations. Furthermore, any statutory fees, products, or services acquired and utilised outside of the United Kingdom are not subject to VAT.
How has to pay VAT?
VAT is tax that is levied on customers. Business owners are responsible for paying VAT to Her Majesty’s Revenue and Customs or HMRC, the expense is already covered by the company’s paying customers. Essentially, businesses act as tax collectors for the HMRC, as well as completely report it.
In the United Kingdom, three different VAT rates apply based on the goods or services delivered.
- Nearly all goods & services are taxed at 20%
- Some products and service like gas and electricity are charged are 5%
- Children’s clothes and most food are exempt from VAT
VAT threshold for Businesses owners
The amount your company can make before having to register for VAT is called the VAT threshold.
In the United Kingdom, the VAT threshold currently stands at £85,000. You must register your firm for VAT once your annual revenue reaches £85,000 or higher.
Once you’ve registered for VAT, you’ll have to charge it on all of the items and services you sell. By registering for VAT, your company will be able to lawfully reclaim any VAT charges it pays on any products or services purchased.
It’s vital to keep in mind that you can’t lawfully charge (or claim) VAT unless you’ve registered. While you are not required to register for VAT if your business revenue is less than the VAT threshold, you can do so if you like. This is called Voluntary registration.
It’s vital to understand that when assessing whether your company has crossed the VAT threshold, it’s calculated over a rolling 12-month period rather than a tax year. To put it another way, it’s time to register your business if it reaches £85,000 turnover in any 12-month period.
Our next article explains how to register for VAT
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