UK VAT - As easy as ABC

We were recently asked by a friend about the basic concepts of VAT and how it affected her as someone who is both an employee and self-employed. As explained below, this is a tax applied to business transactions rather than employment income so it is important to distinguish the nature of your income when applying the VAT principles.

What is VAT?

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man.

It is also charged on goods, and some services, imported from places outside the UK (special rules apply for EU and non-EU imports)

UK and Isle of Man

All goods and services that qualify for VAT are called ‘taxable supplies’.

Once registered for VAT, you must charge VAT on all your taxable supplies, no matter how diverse.

The value of these supplies is called your ‘taxable turnover’.

Examples of taxable supplies include:

• Selling new and used goods
• Renting and hiring out goods
• Providing a service, ie. hairdressing or decorating

Certain services are ‘exempt’ from VAT. These include loans of money, insurance, certain types of education and training and some property transactions (selling, leasing and letting land and buildings, but not garages, parking spaces, hotel or holiday accommodation). Supplies that are exempt from VAT do not form part of your taxable turnover.

Rates of VAT in the UK

• 17.5 per cent (standard-rate)
• 5 per cent (reduced rate)
• 0 per cent (zero-rate).

All goods and services which qualify for VAT at the standard, reduced or zero-rate are called ‘taxable supplies’, whether you are registered for VAT or not.

Registration Requirements

You must register for VAT if:

• At the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £64,000 or

• At any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold - £64,000 - in the next thirty days alone.

(Value of taxable supplies = Taxable turnover = Total income from the sale of taxable supplies and NOT just the profit made.)

To register for VAT you must complete form VAT1 which you must send to HMRC within 30 days of any of the above. You will then receive a certificate of registration (form VAT4) detailing the effective date of registration along with your registration number.

Registration can be done online on the HMR&C government website.

Voluntary Registration

There are advantages and disadvantages to registering voluntarily. Before you apply weigh up carefully whether it will benefit you.

Benefits include :

• Increased credibility for your business and,
• If your business makes standard or zero-rated supplies, you’ll be able to claim back input VAT that you have paid.

However, once registered for VAT, you'll have to:

• Account for output tax on all your taxable supplies
• Keep proper VAT records and accounts
• Send in VAT regular returns
• Charge VAT on all supplies that could reduced your competitive edge in terms of prices.

Rule Breakers

If you don’t register for VAT at the correct time you will still be liable to pay VAT on taxable supplies and you are likely to pay penalties for late payment.

VAT Return

If you are registered for VAT, you are basically acting as a tax collecter on behalf of the revenue office. The return you file (normally every 3 months) simply compares the amount of VAT you have received (Output VAT) to the amount of VAT you have paid (Input VAT) and the difference is settled with the tax man. The return must be filed no later than the last day of the month following the period being reported.

Input VAT is the VAT that you pay out to your suppliers for goods and services that you purchase for your business, ie. the VAT added to the invoices you receive IN the post.

Output VAT is the term used to describe the VAT you charge on your sales of goods or services, ie. what you add on the invoices you send OUT.

VAT returns can also be done electronically

Exempt/Zero-Rated Supplies

If the only services you supply are exempt supplies, you can’t normally be registered for VAT.

If you are registered for VAT and have some exempt supplies you may not be able to get all your input VAT back.

If you only supply goods that are zero-rated, you may not have to register for VAT even if your taxable turnover goes above the registration threshold, but you do have to tell HM Revenue & Customs (HMRC) first and apply to be ‘exempt from registration’.

Registration might be worth considering if you supply zero-rated supplies and have paid a lot of VAT in relation to business costs, as you will be able to reclaim the VAT you have paid.

Deregistration

If you no longer qualify for compulsory registration and want to deregister, it is compulsory to inform HMR&C.

This is just a basic overview. For more information call the National Advice Service 0845 010 9000 or drop us a line.