An Introduction to VAT basics
VAT stands for Value Added Tax. It is a tax that applies to most business transactions involving the transfer of goods or services.
Who needs to register for VAT
You don't have to be a Limited company to become VAT registered and if you are a Limited company you don't necessarily have to become VAT registered.
Any company must register for VAT once its turnover (not profit) exceeds a certain amount. The VAT threshold is currently £68k in any 12 month period. You are legally obliged to register for VAT with Her Majesty’s Revenue and Customs (HMRC) within 30 days of reaching this level of turnover.
Voluntary VAT registration
Even if your turnover is below the VAT registration threshold you can register for VAT voluntarily if it suits your business situation (see below for more information).
How to register for VAT
The easiest way to register for VAT is to do it online via the HMRC website.
What happens once you register for VAT
Once you are registered for VAT you will have to pay VAT on all your business purchases and charge VAT on all your sales.
The standard rate of VAT is 17.5% (this was temporarily reduced to 15% between 1 December 2008 and 1 January 2010). There is also a reduced rate of 5% VAT and a 0% rate.
If you supply goods or services that are zero rated you'll still need to register for VAT but you can then apply for an exemption. More information on the different VAT rates that apply to different goods and services is available from the HMRC website.
Note that from 1 April 2010 any business with an annual turnover of £100,000 or more (excluding VAT), and all newly VAT registered businesses, will have to file their VAT returns online and pay their VAT electronically. There will be no other options available.
HMRC will be sending formal letters, in February 2010, to all existing businesses affected by the new online filing and electronic payment requirements, confirming that in future they must file online and pay electronically.
Further help and advice, including an online demonstrator and a step-by-step guide to filing VAT online, is available on the HMRC website.
VAT explained
Once your business is registered for VAT it will pay VAT on its purchases (‘input tax’) and charge VAT on its sales (‘output tax’).
The cost to your business is ultimately neutral because if your business receives more output tax from sales than it pays in input tax on purchases, it must pay the difference to HMRC. If more input tax has been paid than output tax charged, HMRC will refund the difference to the business.
How to keep VAT records
Once you’re registered for VAT, there are some simple changes you’ll need to make in the day-to-day running of your business. Usually your normal business records can be adapted quite easily to provide this information. Records must be kept for a minimum of six years.
How to keep VAT sales records
- As soon as you register for VAT you will need to include the appropriate rate of VAT on your invoices.
- Your VAT invoices must show the rate and amount of VAT charged together with the VAT number given to your business when you registered.
- You must keep copies of all VAT invoices you send for a minimum of six years.
- You will need to keep a separate record of the amount of VAT you have charged (your ‘output tax’).
How to keep VAT purchases records
- You must have a VAT invoice for all your purchases to be able to reclaim any VAT paid.
- All VAT invoices you receive must show the rate and amount of VAT charged together with the supplier’s VAT number otherwise you will not be able to reclaim the VAT you pay.
- You must keep copies of all VAT invoices you receive for a minimum of six years.
- You will need to keep a separate record of the amount of VAT you have paid (your ‘input tax’).
Voluntary VAT registration
Even if your business turnover is below the registration threshold you can register voluntarily for VAT.
Advantages of voluntary VAT registration
- You maybe able to reclaim some of your input tax
- It adds credibility to your business
- Some businesses prefer or will only deal with suppliers who are VAT registered
- If your customers are VAT registered they can reclaim the VAT you charge them
Disadvantages of voluntary VAT registration
- The additional administration involved in keeping a record of input and output tax and filing regular VAT returns
- If your customers are the general public or non-VAT registered businesses they are unable to reclaim the VAT so your prices may become uncompetitive
More information on registering for VAT is available from the HMRC website or you can call the VAT helpline which is open from 8.00 am to 8.00 pm, Monday to Friday, on 0845 010 9000.
Special VAT schemes for small business
There are some special VAT payment schemes specifically designed to support small businesses:
Cash Accounting Scheme
The Cash Accounting Scheme allows you to account for VAT only on the invoices you have received payment for, rather than on those that have been issued. However VAT on purchases can only be used in your calcualtions once you have paid your supplier for those purchases, rather than items you have received invoices for.
Annual Accounting Scheme
The Annual VAT Accounting Scheme allows you to make one VAT return a year rather than four, and to make a number of interim payments before paying the balance once your annual return has been submitted.
Flat Rate Scheme
The Flat Rate VAT Scheme allows you to calculate your VAT payment as a fixed percentage of your total turnover. The actual percentage you use depends on your type of business. Find out more about the Flat Rate VAT scheme.
HMRC also provides a ready reckoner to help you calculate how much VAT you might pay under the Flat Rate Scheme
If you are in your first year of VAT registration you get a 1% reduction in flat rate. This means you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.
Retail VAT Schemes
If you sell to the general public, especially high quantities of relatively inexpensive items, you may be able to use a Retail VAT Scheme, subject to agreement. Find out more about the Retail VAT Scheme.
VAT margin schemes for second-hand goods, art, antiques etc
If you sell second hand goods, art, antiques etc the VAT Margin Scheme allows you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it - your margin. There is no VAT to reclaim on the item you buy, and you won't pay any VAT if you don't make a profit on a deal. You can still use standard VAT accounting for other sales and purchases such as overheads.
Visit HMRC Accounting Schemes pages for more information on VAT Accounting Schemes for small businesses.
An Introduction to VAT basics
VAT stands for Value Added Tax. It is a tax that applies to most business transactions involving the transfer of goods or services.
Who needs to register for VAT
You don't have to be a Limited company to become VAT registered and if you are a Limited company you don't necessarily have to become VAT registered.
Any company must register for VAT once its turnover (not profit) exceeds a certain amount. The VAT threshold is currently £68k in any 12 month period. You are legally obliged to register for VAT with Her Majesty’s Revenue and Customs (HMRC) within 30 days of reaching this level of turnover.
Voluntary VAT registration
Even if your turnover is below the VAT registration threshold you can register for VAT voluntarily if it suits your business situation (see below for more information).
How to register for VAT
The easiest way to register for VAT is to do it online via the HMRC website.
What happens once you register for VAT
Once you are registered for VAT you will have to pay VAT on all your business purchases and charge VAT on all your sales.
The standard rate of VAT is 17.5% (this was temporarily reduced to 15% between 1 December 2008 and 1 January 2010). There is also a reduced rate of 5% VAT and a 0% rate.
If you supply goods or services that are zero rated you'll still need to register for VAT but you can then apply for an exemption. More information on the different VAT rates that apply to different goods and services is available from the HMRC website.
Note that from 1 April 2010 any business with an annual turnover of £100,000 or more (excluding VAT), and all newly VAT registered businesses, will have to file their VAT returns online and pay their VAT electronically. There will be no other options available.
HMRC will be sending formal letters, in February 2010, to all existing businesses affected by the new online filing and electronic payment requirements, confirming that in future they must file online and pay electronically.
Further help and advice, including an online demonstrator and a step-by-step guide to filing VAT online, is available on the HMRC website.
VAT explained
Once your business is registered for VAT it will pay VAT on its purchases (‘input tax’) and charge VAT on its sales (‘output tax’).
The cost to your business is ultimately neutral because if your business receives more output tax from sales than it pays in input tax on purchases, it must pay the difference to HMRC. If more input tax has been paid than output tax charged, HMRC will refund the difference to the business.
How to keep VAT records
Once you’re registered for VAT, there are some simple changes you’ll need to make in the day-to-day running of your business. Usually your normal business records can be adapted quite easily to provide this information. Records must be kept for a minimum of six years.
How to keep VAT sales records
- As soon as you register for VAT you will need to include the appropriate rate of VAT on your invoices.
- Your VAT invoices must show the rate and amount of VAT charged together with the VAT number given to your business when you registered.
- You must keep copies of all VAT invoices you send for a minimum of six years.
- You will need to keep a separate record of the amount of VAT you have charged (your ‘output tax’).
How to keep VAT purchases records
- You must have a VAT invoice for all your purchases to be able to reclaim any VAT paid.
- All VAT invoices you receive must show the rate and amount of VAT charged together with the supplier’s VAT number otherwise you will not be able to reclaim the VAT you pay.
- You must keep copies of all VAT invoices you receive for a minimum of six years.
- You will need to keep a separate record of the amount of VAT you have paid (your ‘input tax’).
Voluntary VAT registration
Even if your business turnover is below the registration threshold you can register voluntarily for VAT.
Advantages of voluntary VAT registration
- You maybe able to reclaim some of your input tax
- It adds credibility to your business
- Some businesses prefer or will only deal with suppliers who are VAT registered
- If your customers are VAT registered they can reclaim the VAT you charge them
Disadvantages of voluntary VAT registration
- The additional administration involved in keeping a record of input and output tax and filing regular VAT returns
- If your customers are the general public or non-VAT registered businesses they are unable to reclaim the VAT so your prices may become uncompetitive
More information on registering for VAT is available from the HMRC website or you can call the VAT helpline which is open from 8.00 am to 8.00 pm, Monday to Friday, on 0845 010 9000.
Special VAT schemes for small business
There are some special VAT payment schemes specifically designed to support small businesses:
Cash Accounting Scheme
The Cash Accounting Scheme allows you to account for VAT only on the invoices you have received payment for, rather than on those that have been issued. However VAT on purchases can only be used in your calcualtions once you have paid your supplier for those purchases, rather than items you have received invoices for.
Annual Accounting Scheme
The Annual VAT Accounting Scheme allows you to make one VAT return a year rather than four, and to make a number of interim payments before paying the balance once your annual return has been submitted.
Flat Rate Scheme
The Flat Rate VAT Scheme allows you to calculate your VAT payment as a fixed percentage of your total turnover. The actual percentage you use depends on your type of business. Find out more about the Flat Rate VAT scheme.
HMRC also provides a ready reckoner to help you calculate how much VAT you might pay under the Flat Rate Scheme
If you are in your first year of VAT registration you get a 1% reduction in flat rate. This means you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.
Retail VAT Schemes
If you sell to the general public, especially high quantities of relatively inexpensive items, you may be able to use a Retail VAT Scheme, subject to agreement. Find out more about the Retail VAT Scheme.
VAT margin schemes for second-hand goods, art, antiques etc
If you sell second hand goods, art, antiques etc the VAT Margin Scheme allows you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it - your margin. There is no VAT to reclaim on the item you buy, and you won't pay any VAT if you don't make a profit on a deal. You can still use standard VAT accounting for other sales and purchases such as overheads.
Visit HMRC Accounting Schemes pages for more information on VAT Accounting Schemes for small businesses.