We all see on our receipts a VAT element (or are offered a VAT receipt), for example when you fill your vehicle up with fuel; but if you own your own business, just started, or thinking of starting up a new business, do you understand VAT and whether it is applicable to you and your business? Here I have put together a simple guide explaining what you need to know and how to get started. Outsource Accounting
VAT is a tax that is charged on the majority of goods or services provided in the UK by businesses who are already VAT registered. As well as businesses who provide goods and services in the UK, VAT can apply to some goods and services that are imported from countries outside of the European Union (EU) and brought into the UK. To be able to charge this tax, you have to be VAT registered. VAT registered means that you have told and signed up with HM Revenue & Customs and your business has been given its own VAT registration number. If you are VAT registered, it means that when your business sells either a product or a service you will need to charge your customer VAT at the current applicable rate (see later explanations about the applicable rate), whether your customer is VAT registered or not. If you are a VAT registered business, you are also able to reclaim any VAT charged when your business buys a product or service. Basically if you are VAT registered you charge your customers VAT on the goods or services you provide and you reclaim the VAT that your business pays when you buy any products or services. You have to account for your VAT to HM Revenue & Customs, usually on a quarterly basis, and it is the difference between your the VAT you have charged to your customers and the VAT your business is entitled to reclaim which determines if you have a VAT liability. If you are not VAT registered, then you cannot reclaim any VAT that you pay for any goods or services for your business. There are restrictions and rules that you have to comply with when reclaiming the VAT on your purchases.
How do you know how much VAT to charge your customers? VAT rates are set by the Government and there are currently (at the time of writing) three rates of VAT, the first being the standard rate (currently 17.5%), the second a reduced rate of VAT (currently 5%) and a zero rate of VAT (0). Majority of goods and services are charged at the standard rate of VAT, but there are some exceptions to this and some goods and services where you are allowed to charge either the reduced rate of VAT, such as domestic fuel and power, children’s car seats, installing energy saving materials and sanitary hygiene products or the zero rate of VAT such as certain food products purchased (not eating out), books and newspapers public transport and children’s clothes and shoes. There are also some goods and services which are exempt from VAT or outside the UK VAT system such as insurance, providing credit, membership subscriptions, services from doctors and dentists and some education and training items.