Tweak Your Biz: Understanding VAT For Your Business

What is VAT?

A value-added tax (or VAT) is the consumption tax that is always imposed on products when the value is added at every stage starting from the production all the way to when the product is sold. In some countries, VAT is referred to as goods and services tax or simply, GST. This is a tax that is normally assessed incrementally in relation to the increase in either the value of products or services at every stage of production and distribution.

Essentially, VAT serves the purpose of compensating for the infrastructure and shared services provided by the state and funded by the taxpayers. This doesn’t mean that VAT is charged on all goods and services. There are some exemptions and that is where duty-free comes in. Nevertheless, VAT is somehow regarded as the destination-based tax whereby the tax rate is usually based on the consumers’ location and the sales price.

It is a well-known fact that VAT is responsible for raising a huge percentage of the total tax revenues all over the world. In the UK alone, VAT plays a significant role in generating the third largest revenue for the government behind National Insurance and Income Tax.

As a business under the VAT threshold, you need to make sure you understand how VAT is applied to your products, your sales, and your purchases, speaking to a good VAT accountant and setting baseline systems to record, monitor and report VAT should be a very important step for your business.

What is the VAT rate in the UK for 2019?

Despite the fact that the UK is under obligation to adhere to the VAT regulations laid down by the EU, it still has more freedom to come up with its own VAT rates. This includes the upper or standard VAT rate and the rest. But the only underlying condition attached to that agreement is that the rate should be more than 15 %. However, the suppliers and providers of products and services which are VAT registered have the obligation to charge the required VAT rate, collect the tax and make the onward payments to the relevant tax authorities via a VAT filing. Here are the current VAT rates in the UK (as per 2019):

The UK VAT rates

The Standard VAT Rate: Its rate is 20% and is applicable to all other goods and services that are taxable in the UK.
The Reduced VAT Rate: At 5%, the Reduced VAT rate is applicable for goods such as children’s car seats, electricity, certain social housing, natural gas, some social services as well as district heating supplies for domestic use only. Also, this rate covers energy saving domestic installations, LPG and the heating oil for domestic use only, repairs and renovations for some private dwellings, and medical equipment for the disabled.
The Zero VAT Rate: This rate stands at 0% and it covers printed books except for e-books, newspapers and periodicals, some social housing, renovations to private dwellings, household water supplies, collection of domestic refuse, basic foodstuffs with exception of pre-cooked food, take away food, prescribed pharmaceutical products, cut flowers, children’s footwear and clothing, seed supplies and so on. Even though there are no charges on zero VAT rates, the sale of goods and services under this category should always be recorded and the report prepared on the basis of your VAT return.

You need to be fully aware of emerging changes in the VAT rates especially when calculating the VAT. Which is why it is recommended that you keep up to date with the information regarding the latest rates in order to ensure that your accounts and invoices are accurate. A VAT calculation can get complex, our trained VAT accountants are ready to help you with all matters VAT related.

Who needs to register for VAT?

Business owners need to be fully aware of the value-added tax and all other things related to it no matter what. That is why it is important to know, for example, the VAT threshold and when proceeding with VAT registration is necessary. On top of that, you need to consider the great benefits that come with registering for VAT even if your VAT return is way below the threshold.

At the moment, the value-added registration threshold in the UK starts from 85,000. This means that in case you realize that your businesses yearly turnover is more than this threshold, you are obliged to register for VAT. Failure to do so in a period of 30 days will amount to a fine that you will need to pay. This figure is likely to change from time to time. For example, it was standing at £ 83,000 in 2016 after rising steadily from £ 77,000(2012) and £ 64,000 in 2007. To stay abreast of this vital information, you must check the threshold for each financial year to know how much you have to pay when registering for VAT. Make effective use of accounting software to help you monitor your turnover in a bid to know when you are about to hit the VAT threshold, it is advisable to use online accountants who are fluent at the use of modern software and technology.

The VAT turnover is calculated based on the rolling 12-month basis from any given point that is not based entirely on a calendar year. In short, when your turnover is more than the VAT threshold (let’s say £ 85,000) you need to register for VAT. But you can as well decide to register your business on a voluntary basis. Otherwise, you must register for VAT when you:

Take full control of a business that is already VAT registered
Sell products and services that are already exempted from VAT
Are you supplying goods and services to the United Kingdom or when you are looking forward to doing so in the coming 30 days.

How to register for VAT in the UK

Businesses can register for VAT online whether they are operating as partnerships or groups of companies. By doing so, you will register for VAT and eventually create your VAT online account commonly referred to as the Government Gateway account. This account will enable you to submit your returns to the relevant authorities like HM Revenue Customs (HMRC).

You may also opt to use means other than online registration. In this case, you are obligated to do your registration by post through VAT1 but under certain circumstances such as :

Applying for the registration exception
Join Agricultural Flat Rate Scheme
Registering business units or divisions of a given body corporate

However, when registering your VAT through the post, you will need the following forms:

VAT1A for the EU business distance selling to the United Kingdom
VAT1B for importing goods whose value is more than 85,000 from an EU member state
VAT1C when disposing of any assets with which refunds (8th or 13th Directive refunds) have been claimed.

VAT Record-Keeping requirements

Every VAT registered business must:

Keep all records of purchases and sales
Keep a summary of their VAT (known as VAT account)
Issue the right VAT invoices.

In addition, you must keep your VAT records for a period not less than six years or ten years if you are using the VAT MOSS services. These records can be kept electronically, on paper or in a software program. Your records should be accurate, readable, complete and easy to understand. Records that you need to keep must include the following:

Copies of the invoices you issue
Invoices received
Sell-billing agreements
The names, addresses and VAT numbers of the self-billing suppliers
Debit/credit notes
Imports and export records
Records of goods you can’t reclaim their VAT on
Records of received and dispatched goods
VAT account on top of that, you need to keep records of bank statements, cheque stubs, cash books, till rolls and paying-in slips.

What are the VAT returns?

VAT returns calculate the amount of VAT that a company needs to pay to HM Revenue and Customs (HMRC). In other words, the VAT return calculates what you owe HMRC or vice versa in terms of VAT. The amount depends on:

The total sales and purchases in a 3-month accounting period
The total amount of VAT you owe for all the sales
The amount of VAT that you can reclaim for all the purchases

Tips about submitting a VAT return

You need to submit your VAT returns via the authorized HMRC approved Making-Tax Digital software. If your business is not required to get registered for VAT but you instead opt involuntarily, you can choose to submit your VAT returns online manually. Most importantly, you need to be submitting your VAT returns once a year at least, after your accounting period. You can read our layman’s guide to MTD here.

Deadlines for VAT

The VAT deadline for submission is due on the first calendar month including the seven days duration following your VAT end period. Your VAT period end can be monthly, quarterly, twice a year or annually.

Making Tax Digital for VAT

In the UK, the Financial Secretary to the Treasury and Paymaster General made an announcement on 13 July 2017 informing the general public that the Making Tax Digital software for VAT would come into effect starting April 2019. Every business with a VAT turnover exceeding the current VAT threshold will have to:

Ensure that their records are kept digitally
Submit their reports on VAT return to HM Revenue and Customs (HMRC) via Making Tax Digital (MTD) software.

He further confirmed that Making Tax Digital will be made available on the voluntary basis to businesses for Income Tax and VAT.

Our Accounting firm is ready to help you prepare for MTD, we have worked with industry leading software providers to prepare and provide you with MTD compliant software or bridging software enabling you to stay compliant with MTD requirements with no hassle or business disruption.

How to find a good VAT Accountant

Finding a good VAT Accountant in the UK should not consume too much of your time. You can search for an accounting firm nearby, VAT Accountants or ask someone to refer a competitive Accountant. You also have the option to look for online accountants, various companies have listed their services but choosing the right one can be a daunting task. You may rely on referrals from other businesses or refer to customer reviews to shortlist a good VAT accountant. These accountants offer a wide range of services that are VAT-related starting from refund schemes to VAT exemptions all the way to transactional VAT advice.

Clear House Accountants are specialist Accountants in London, we have an in-house team of specialists working with clients with a variety of VAT problems. Our smart and innovative solutions make sure our clients can have peace of mind in relation to VAT compliance while focussing on growing their business.

Value Added Tax

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