VAT
VAT, or Value Added Tax, is a tax that applies to
virtually all business transactions involving the transfer of good and
services. Once your business reaches a certain threshold, then you have to
start paying VAT to HM Revenues and Customs on anything you buy or sell. This
article aims to give you the basics of VAT, and how the system works.
How VAT works
If
your income goes above the threshold, which changes yearly but currently stands
at just over £61,000 a year, then you need to register for VAT. You also need
to register if you think within the next month you will sell more than £61,000
in goods or services. You will then pay VAT on all the purchases that you make
in your business, which is known as input tax. You then charge VAT on all the
sales that you make, which is known as output tax. These two VAT levels should
be equal, and if one is higher than the other then the difference needs to be
made up through payment or reimbursement. Some goods are obviously not taxable
by VAT, such as education, insurance, or loans. If your business supplies these
exempt services, then you cannot register for VAT.
Voluntary VAT registration
Even
if your income is not above the threshold, you can still register for VAT. You
might want to do this if you sell to other VAT registered companies, so that
you can reclaim some of your input tax. It also increases your credibility, and
many companies prefer dealing with someone who has a VAT number. However, if
you do not sell to other VAT registered busineses or just to individuals, then
voluntarily registering for VAT may not be a good idea. Also, you will have to
keep VAT tax records which will leave you with a lot more paperwork to handle.
Changes to your business
Once you have registered for VAT,
then you will have to change a few of your business procedures. These include
issuing VAT invoices, as well as keeping a record of VAT both outgoing and
incoming.
If
you register for VAT, there are some changes you will need to make in the
day-to-day running of your business. You must also have a VAT invoice for all
purchases so that you can claim it back.
VAT rates
When
you are registered for VAT, it is important to know how much VAT you should
charge. There are three rates of VAT: 17.5%, 5% AND 0%. You need to do some
research to check which rate your goods and services fall under. The standard
rate covers most items, with fuel, power and residential conversions being
examples of 5% goods. Food, books and outside-EU exports are examples of 0% VAT
rate goods. These zero percent items are still taxable, so cannot be classed as
VAT exempt.
Dealing with HM Customs and Excise
HM Customs and Excise are
the organisation that deals with VAT. You will first deal with them when you
register for VAT. They have many offices around the country, and which office
you deal with depends upon your postcode. If you want to know more about VAT
and HM Customs and Excise you should go to their website at www.hmce.gov.uk
VAT visits
Many companies will get
visits from HM Customs and Excise. If your company is visited, do not worry, as
it does not mean they think you have done something wrong. They are there to
take a closer look at your records, and make sure everything is in order.
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Although
VAT might seem complex at first, it is actually quite simple. If you do have to
register for VAT, then you need to be aware of all the things you need by law
to keep and maintain, such as adequate records. VAT is not meant to cost you
anything as a company, because the burden of the tax falls upon the consumer.