Value Added Tax (VAT)
What is VAT?
VAT, or value added tax, is a tax paid on most goods and services, collected on behalf of HMRC. To charge VAT you need to own a VAT registered business. Such VAT registered businesses add VAT to their sales invoices and then reclaim VAT in items they buy. However, if you are not VAT registered, you still pay VAT, but cannot reclaim it.
Who pays VAT?
VAT is paid when a business makes a VAT taxable turnover of more than £85,000 over 12 months or if you expect to go over that sum in the next 30 days.
The only requirement of being registered for VAT is meeting the threshold of £85,000 in VAT taxable turnover.
However, not all businesses will pay the full VAT rate. Some will be obliged to pay the reduced rate or will be registered for a 0% VAT rate, dependent on the industry they operate in. . Usually, if the industry provides basic needs such as medical health and childcare, the VAT rate will be reduced.
What is VAT chargeable on?
VAT is charged on the following:
goods and services;
hiring or loaning goods to someone;
selling business assets;
commissions;
items sold to staff - eg. canteen meals;
business goods used for personal reasons; and
‘non-sales’ such as bartering, part-exchange and gifts
The difference between VAT exemption and Zero rate VAT.
VAT exempt and zero-rate VAT are two categories of VAT exemptions. The effect of both is that the consumer does not pay VAT on the goods and services purchased from the companyIndustries providing exempt goods and services can claim back any VAT they pay in expenses during the course of business. In contrast, zero-rated industries cannot claim back any VAT charged through their expenses. Therefore, from a non-exempt business perspective, purchase of zero-rates supplies should be recorded in the VAT accounts.
What industries are VAT exempt?
This is decided by local authorities. In the UK it will be decided by the national government and the EU directives. VAT exempt goods and services include:
financial services, investments and insurance;
garages, parking spaces and houseboat moorings;
property, land and buildings;
education and training;
healthcare and medical treatment;
funeral plans, burial or cremation services;
charity events;
antiques;
gambling or lottery tickets; and
sports activities.
This means, VAT cannot be charged on products and services sold, and any VAT incurred in the process of running the business in such an industry can be claimed back from HMRC.
For instance, if a private school is exempt from VAT, as they fall under ‘Education and Training’. Therefore, private schools cannot charge VAT as part of their fee. When purchasing supplies for the school, such as paper and pens, the school may incur VAT charges that they must pay for at the time of purchase. Later, the VAT paid on these supplies can be claimed back from HMRC.
What industries are zero-rated?
Some industries sell products which they cannot charge VAT on but cannot claim back any VAT incurred from producing those products. Some examples include:
cars;
certain building materials;
items sold under a margin scheme and other schemes;
business entertainment;
domestic accommodation;
books; or
children’s clothes.
For example, a bookseller who also prints their own books cannot charge VAT on selling the books as they are zero-rated. The supplies, such as the paper and ink purchased to print these books may incur VAT at the time of purchase. Unlike the private school (example above), because the bookseller is zero-rated, they cannot claim back the VAT from HMRC.
What industries both charge and pay VAT?
All industries selling products not VAT exempt or not zero-rated must be VAT registered and charge VAT on products if they are above the earning threshold (below) and cannot claim back VAT on business-related purchases.
What is the rate of VAT?
The standard VAT rate is 20%, applying to most goods and services. The rates differ depending on the industry of goods or services sold.
VAT and startups
It is unlikely that a startup will have to pay VAT at the beginning of its operations. However, with time and development the business might need to register for VAT and start paying or charging it.
When to register for VAT?
As mentioned above, you have to register when your VAT taxable turnover is £85,000 or more per year or if it will reach £85,000 in the next 30 days. You must also register (regardless of VAT taxable turnover) if all of the following are true:
you’re based outside the UK;
your business is based outside the UK;
you supply any goods or services to the UK (or expect to in the next 30 days).
You can choose to register for VAT if your turnover is less than £85,000 (‘voluntary registration’). You must pay HM Revenue and Customs (HMRC) any VAT you owe from the date they register you. However, if everything you sell is exempt for VAT, you do not need to register.
How to register?
To register for VAT you will need a Government Gateway user ID and password. You can either do it yourself or appoint an agent (usually an accountant) to do it for you.
Then you’ll need to provide more documents depending on what kind of business you have. If you are a limited company you’ll need:
the company name;
details of turnover and nature of business;
bank account details;
Company Registration Number;
Unique Tax Reference (UTR) number.
You’ll also need to give information about your:
Corporation Tax;
Pay As You Earn (PAYE);
Self Assessment.
If you are an individual or partnership you’ll need:
date of birth;
National Insurance number;
ID such as a passport or driving licence;
details of turnover and nature of business;
bank account details.
You do not need to have a Self Assessment UTR to register for VAT but if you have one, you must provide it. You’ll also need to give information about your:
payslips;
P60;
Self Assessment return.
You can access the VAT registration page here.
Author: Zofia Bonarowska -
Author: Zofia Bonarowska -
In partnership with
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
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