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Value Added Tax (VAT) is a levy added onto most transactions of goods and services in the UK. It is a consumption tax collected at every stage of production and distribution, charged only by VAT registered companies.

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There are several different ways you can account for VAT that could save you time and improve your cash flow. Some VAT accounting schemes have been designed for specific trade sectors, while others have been designed for general businesses. This blog will provide an overview of Standard Rate VAT.

VAT rates

VAT is charged on most business transactions, on most goods and some services.

There are three rates of VAT applied by businesses in the UK:

Name Rate Main use
Standard rate 20% Most goods and services
Reduced rate 5% Some goods and services, eg, children’s car seats and home energy
Zero rate 0% Zero-rated goods and services, eg, most food and children’s clothes

The VAT rate businesses charge depends on their goods and services.

What is the standard VAT scheme?

Under the standard VAT scheme, you will usually file a quarterly return where you report VAT on your sales and business expenses. VAT registered businesses will have to pay HMRC the difference or will receive a refund if VAT on costs is more than VAT on sales.

For example, if in a VAT quarter sales are £50,000+VAT and expenses are £9,000+VAT, your VAT calculation would be as follows*:

VAT type Calculation Amount
VAT on sales (£50,000 @20%) £10,000
VAT on costs (£9,000 @20%) (£1,800)
VAT liability = £8,200

* Please note, this example is based on businesses charging VAT at 20%.

When to register

You must register for VAT if:

  • The taxable turnover of your business in the previous 12 months reached the VAT registration limit (£85,000 from 01/04/17), although you may also register on a voluntary basis if your turnover is below this.
  • You believe your turnover in the next thirty days will exceed the registration limit.
  • You take over a business as a going concern whose turnover meets the conditions in the previous two points.
  • You buy goods from elsewhere in the EU to a value above the registration limit in one calendar year.

Once registered, you must charge VAT on all taxable supplies.

There are penalties for failing to register on time.

Should you register?

If your taxable turnover is below £85,000 you do not have to register but you may be eligible to apply for ‘voluntary registration’.

There can be advantages in registering; such as:

  • Increased business credibility.
  • Potential savings if your suppliers are zero rated (you can still reclaim VAT on purchases).
  • Potential savings if you mainly supply other VAT registered businesses who do not mind being charged VAT (you may then reclaim VAT on your purchases).

However, this does have to be weighed up against the hassle factor of completing VAT returns and paying the VAT due every quarter. If you supply the general public you will probably not want to register as this increases your prices by 20%.

Responsibilities

VAT-registered businesses must charge VAT on their goods or services and may reclaim any VAT they have paid on business-related goods or services.

f you are a VAT-registered business you must report the amount of VAT you have charged to HMRC and the amount of VAT you have paid. This is done through your VAT return, which is usually due on a quarterly basis.

Businesses must account for VAT on the full value of what you sell, even if:

    • You receive goods or services instead of money (for example, if you take something in part-exchange).
    • You have not charged any VAT to the customer – whatever price you charge is treated as including VAT.

If you are unsure of the tax you need to pay or the information you need to provide, you should appoint an agent (accountant) to liaise with HMRC on your behalf.

How can we help?

Cobia Accounting provides specialist accounting and tax planning services for freelancers, contractors, self-employed individuals and small businesses for a fixed monthly rate (with no hidden costs). This includes the services of a dedicated accountant and access to award-winning online accounting software you can use for invoicing and logging expenses.

To find out more about how Cobia Accounting can assist with your company accounting and tax planning requirements, contact us today.