What Is VAT?
Value Added Tax (VAT) is an extra charge on certain goods and services, including things like:
- loans or hired goods
- gifts, exchanges, bartering
- items or goods you sell to staff
- goods and services you sell
- business goods for personal use
- business assets sold
VAT can only be charged if your business is registered.
There is no one standard VAT rate; in fact, there are 3 different ones: standard, reduced, and zero.
Most services or goods fall under the standard rate. It also includes services supplied to EU customers, as well as goods sold to EU customers that are not VAT registered and that fall below the threshold for distance selling.
There are certain goods that qualify for a reduced VAT rate, including mobility aids for the elderly, domestic fuel, and children's car seats, all charged at 5%.
There are goods that still need to be reported, but the VAT charged is 0%. It includes the majority of non-EU country exports, shoes and clothes for children, goods supplied to a EU business registered for VAT, motorcycle helmets, and newspaper and books.
When Do Businesses Need To Register For VAT?
In case you were wondering, yes, there are certain circumstances under which a business needs to register for VAT, which means that not all of them need to do this.
You need to register when your VAT taxable turnover (everything you've sold that is not exempt from VAT) exceeds the £85,000 threshold, according to GOV.uk. That is the requirement, but you may also voluntarily register even if you make less than that amount.
Compulsory registration is necessary in the case where you do exceed the threshold or you know you are set to exceed it. You may register either in the 30 days leading up to exceeding the threshold or in the 12 months after it.
It is also necessary if you supply goods and services to the UK even if you are based outside the UK, if you take over a business that is VAT registered, or if the services and goods you provide or sell are VAT exempt, but are worth more than £85,000.
Please remember that VAT may still be necessary if you are self-employed. Here is some information from Step Change on being self-employed and paying taxes.
Can I Get An Exception?
Exceptions from VAT are sometimes possible when you temporarily exceed the threshold. All you have to do is send in evidence to the HMRC that you will not exceed the de-registration threshold in the following 12 months. The de-registration threshold is £83,000. HMRC may or may not consider and accept your exception. If you are exempt, you will receive confirmation. If not, you will be automatically registered for VAT.
How Do Businesses Register For VAT?
Registering for VAT is simple enough and there are multiple ways to do it. The easiest way is to do it online on the HMRC page. You will have a VAT online account that you will use to send in your VAT Returns to HMRC. You can do this yourself or you can have your accountant do it for you.
If online registration isn't possible, you can also register by post, using a form. Here are some of the uses and forms you may need:
- Use VAT1 if you want to join the Agricultural Flat Rate Scheme, or if you want to apply for an exemption
- Use VAT1A if you're a business based in the EU that is "distance selling" to the UK
- Use VAT1B if your business imports over £85,000 worth of goods from a country in the EU
- Use VAT1C if your business wishes to dispose of assets that have had 8th or 13th Directive Refunds claimed
What Do Businesses Need When Registering for VAT?
There are, of course, certain details you need to provide to the HMRC when registering for VAT, such as:
- bank details
- business activity
An agent does not need to be authorised to register your business for VAT, and please know that your "effective date of registration" will be your registration date. Any and all due VAT will be payable starting with this date.
What Are The Advantages And Disadvantages?
Registering for VAT comes with both advantages and disadvantages. The main advantage is that VAT registration can give an extra sense of legitimacy to a small business, even if its turnover is less than £85,000. In addition, it's applied to the cost of most goods and services your business provides.
As for disadvantages, it can add an unattractive extra charge to customers who are not VAT registered, it comes with a lot of additional paperwork you need to keep track of as an extra responsibility, and your bill can be massive if you make more VAT in goods sold than VAT paid on what you bought somewhere else. If you found this useful for your small business, you might also be interested in Christmas Marketing Strategies For Small Businesses.