What Does My Business Need to Know About VAT?

As you may know, VAT stands for Value Added Tax. You probably know that businesses have to pay it, and so do consumers. But that might be the limit of your understanding. Because you are a business owner, director, or part of the business’s senior management, you want to ensure you understand all of your company’s obligations for VAT. This article will explore in detail what your business needs to know about VAT.

Overview 

VAT is a type of tax called a ‘consumption tax’. This means that the end consumer of goods or services will ultimately bear the tax cost. Nonetheless, at each point in the supply chain, businesses will have to pay for their supplier’s VAT, and in turn, charge VAT to their customers or clients. 

Is My Business Liable for VAT?

If your business’ turnover exceeds £85,000, you must register with HMRC for VAT and complete a VAT return. 

VAT Exemptions 

Businesses that supply certain goods or services are exempt from VAT and therefore do not register with HMRC even if their annual turnover exceeds £85,000. These goods and services include:

• selling and leasing commercial land; 
• education;
• insurance finance and credit; and
• health services (such as those provided by your doctor or pharmacist). 

Understanding Input and Output Tax 

The motivating idea behind VAT is that the final consumer should be the one that pays the tax. At every point before then, businesses are only liable if they add value somehow. 

Therefore, businesses will deduct VAT on any goods and services they have received (input tax) from the VAT they charge on any goods or services (output tax). However, if there is any difference between output and input tax, the business will have to account to HMRC for it. This difference is the value add that value-added tax refers to.

Calculating the Rate 

Most services provided or goods sold are liable to pay VAT. However, there are exceptions for essential items like medicine and medical treatment and food (which are not charged) and essential goods and services such as household utilities and safety equipment (charged at a lower VAT rate). 

For items exempt from VAT, you must still record the transaction for VAT purposes, but it is not assessed. 

In practice, if you are supplying a good or service to a customer, you will typically identify the price you would have charged for its supply absent any VAT and then increase the price by that amount. 

If your customers are other businesses, it is common to advertise any prices exclusive of VAT. However, if your customers are consumers, you generally must quote the price as inclusive of VAT. 

How To Pay HMRC Your VAT 

Provided your annual turnover exceeds £85,000, you will need to register with HMRC to receive your VAT registration certificate. This will confirm:

• your VAT number;
• when you must submit your first VAT Return; and 
• the date of effective registration, which is the date your business’ turnover exceeded £85,000. 

Most business owners prefer to account to HMRC quarterly (i.e., once every three months). However, you can choose to make monthly payments as well. 

Furthermore, you can file your returns electronically through the Government’s website. If you are the company’s director, you will need to sign the form on your company’s behalf. 

Record Keeping

To ensure you are meeting your VAT liabilities, you will need to keep adequate records of your transactions. This includes records of all input tax you have had to pay, as well as the tax you have charged your customers or clients (output). 

As far as output tax is concerned, you will need to correctly invoice your customers by including the amount of VAT you are charging them. 

Key Takeaways 

VAT stands for Value Added Tax, a tax system designed for the consumer to bear the ultimate costs of the tax. In practice, businesses must account to HMRC for their VAT when they add value to the supply of goods or services. The ‘VAT Threshold’ is the point at which your business must register for VAT and account to HMRC for their liability. The VAT Threshold is currently any company that makes more than £85,000 in annual turnover on non-exempt goods and services (the ‘vat taxable turnover’). Therefore, many small businesses will not have to account for VAT. The standard VAT rate is 20%.

If you need help understanding your VAT liability or any other tax obligations, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions