VAT: input tax, output tax, and everything else you need to know
Do you know your input tax from your output tax? If not here’s the basic things you need to know about VAT, how to register for VAT, charging VAT, paying or reclaiming VAT, and submitting a VAT return.
Value Added Tax (VAT) and how it works
There are 2 elements to VAT:
- Output VAT, or output tax, is the tax you charge on what’s going out of the company ie what you’re selling
- Input VAT, or input tax, is the tax you pay on goods and services that you buy in to run your business eg raw materials or stock
If you’re registered for VAT the cost to your business is ultimately neutral because if your business receives more output tax from sales than it pays input tax on purchases you simply pay the difference to HMRC. This is almost always the case, however if you pay more input tax than you have charged in output you can claim VAT back from HMRC.
The benefit of being VAT registered is that you can claim back some or all of the VAT you pay on the goods or services you use for your business.
The standard VAT rate is 20% although there are many other rates, including a low rate and a nil rate. If you supply goods or services that are zero rated you’ll still need to register for VAT and 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.
If you’re not VAT registered you must not add VAT to any of your invoices.
Completing a VAT return
You will submit a VAT return and pay VAT quarterly unless you are on a special VAT accounting scheme. HMRC will send you an email notification when you need to submit your VAT return and payment is usually due around 6 weeks after then end of the period you’ve reported.
Find out more about different VAT accounting schemes and ways you can calculate and pay your VAT
Accounting software like KashFlow will do all the VAT calculations you need to fill in your VAT returns at the press of a button. Find out more about KashFlow and take a free trial here.
Registering for VAT
You don’t have to be a Limited Company to register for VAT, and if you are a Limited Company you don’t necessarily need to be VAT registered.
What determines whether you have to register for VAT or not is your business turnover. Once your turnover (not profit) reaches the VAT threshold you must register for VAT. The VAT threshold for the 2014/2015 tax year is £81,000 (up from £79,000 for the prevous year). You must, by law, register for VAT within 30 days of reaching this level of turnover.
Information on registering for VAT is available from the HMRC website, or call the HMRC VAT helpline on 0845 010 9000.
When your business is VAT registered
Once you’re registered for VAT you must:
- Always make sure you’re charging VAT on ALL of your sales
- Show the rate and amount of VAT charged on your invoices
- Include your VAT registration number on your invoices
- Send a quarterly VAT return to HMRC, and pay or reclaim any VAT due
- Keep copies of all VAT invoices you send for at least six years
Voluntary VAT registration
Even if your turnover is below the VAT registration threshold you can voluntarily register for VAT.
Advantages of voluntary VAT registration
- You’ll be able to reclaim the VAT you pay on your business purchases
- It adds credibility to your business
- If your customers are VAT registered they can reclaim the VAT you charge them
Disadvantages of voluntary VAT registration
- The extra admin of keeping a record of input and output tax, and completing regular VAT returns
- If your customers are not VAT registered your prices will seem high as they can’t reclaim the VAT
VAT on digital supplies
From 1 January 2015 if you supply digital services to consumers in the EU the VAT must be paid in the consumer’s country, not the supplier’s country, at the rate that applies in the consumer’s country.
THIS APPLIES EVEN IF YOU ARE NOT REGISTERED FOR VAT IN THE UK.
If you supply digital services to customers in the EU it could mean that you have to register for VAT in every EU member state where you have customers, however HMRC has set up a VAT Mini One Stop Shop (VAT MOSS) service to help businesses with these new regulations.
Registering for MOSS
If you don’t want to register for VAT in other EU member states, you must register for VAT MOSS by the 10th day of the month following your first digital services supply. Digital services supplied before 1 January 2015 don’t count as the regulations only apply to services provided from 1 Jamuary 2015 onwards.
Once you register for a UK VAT MOSS scheme HMRC will set you up automatically for the online VAT MOSS Returns service.
You will submit a single VAT MOSS Return and payment to HMRC each calendar quarter by 20th of the month following the VAT period (eg 20 April for quarter ended 31 March). HMRC will then forward the relevant parts of your return and payment to the tax authorities in the member state(s) where your consumers are located. This fulfils your VAT obligations.