VAT Explained

Tax Payment

It is highly likely that you will have seen the abbreviation “VAT” on a receipt, an example of this is when you fill your car up with petrol or diesel, but if you are a business owner you will be able to claim the fuel costs against your taxes.

I have put together a basic guide that will explain everything that you need to know about VAT and how you can get started.


What is VAT?

VAT stands for “value added tax”, and is a tax that is charged on the majority of products and services provided in the United Kingdom by businesses or companies who are already VAT registered.

As well as businesses that provide services and products in the United Kingdom, VAT is also applicable to some services and products that are imported from countries located outside of the European Union and brought into the UK.

To charge VAT, you will need to be VAT registered. Vat registered basically means that you have made the HM Revenue & Customs aware that your business is trading.

If you are VAT registered, you will need to charge your customers VAT at the applicable rate.

If your business is VAT registered, you will also be eligible to reclaim any VAT that is charged when your business purchases a service or product.

So basically put, if your business is VAT registered you will need to charge your customers VAT on the products or services you provide, and you can reclaim any VAT that your business pays when purchasing products or services.

You will have to account for your VAT to HM revenue & Customs, this is usually done quarterly, this is the difference between the VAT your business has charged customers and the VAT that your business is able to reclaim, this will then determine if you have a VAT liability.

If you are not VAT registered, you will be unable to reclaim any vat that you have paid for services or products for your business. There are a number of rules and restrictions that you must comply with when reclaiming the VAT on your purchases.

Tax Payment


How do I know how much VAT to charge my customers?

VAT rates are set by the Government, at the moment there are three different rates of VAT, the standard rate (20%), the second a reduced rate of VAT (5%) and then a zero rate of VAT (0%).

Most products and services are charged at the standard VAT rate, however, there are a few exceptions to this where you are able to charge either a reduced rate of tax, this is on products such as power, children’s car seats, and energy saving materials.

There are also certain products or services that are exempt from VAT or located outside the UK VAT system such as, membership subscriptions, providing credit, insurance, and services from dentists and doctors, as well as some education or training items.


Should I register my business for VAT?

If you’re a new business, it is optional to register your business for VAT.

You will need to weigh up the numerous disadvantages and advantages of becoming VAT registered, such as in the increase in your pricing and how this may affect your sales levels, you will also need to work out the amount of VAT that your business will be entitled to reclaim to ensure that it’s a financially viable option.

You may also want to consider the additional cost of accounting and bookkeeping procedures that you will need to have in place to ensure that you are fully compliant and able to send your VAT returns in a timely manner.


What next?

If you choose to register your business for VAT, you will need to apply to the HMRC to obtain your unique registration number.

After you have completed your registration with the HMRC you will need to complete regular VAT returns.

When completing your VAT returns you will need to show the amounts of VAT charged on your sales, this is known as the output tax, you will also have to show the vat you have paid on anything that your business has purchased; this is known as the input tax.

If the amount of VAT that you have charged on sales is higher than the amount you have paid on purchases, then you will need to settle the difference with the HMRC.

However, if the amount you have charged on sales is lower than the amount of VAT paid on purchases, then you are entitled to claim a VAT repayment.

Other than the standard forms of VAT accounting there are also some special VAT accounting scheme that offer an alternative way to account for VAT, these can potentially save your business a lot of money and time, these will need to be considered with caution.


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