VAT is short for Value Added Tax, and is a charge put on the sale of goods or services by registered UK businesses. VAT payments are collected by companies and paid to HM Revenue & Customs.
VAT is calculated and charged to customers on good and services that are VAT-rated. All goods and services are either VAT-rated or VAT-exempt, an example of something that is VAT-exempt would be gambling, so you wouldn't have to pay VAT on any winnings. Rent payments, health services and financial insurance are other examples of VAT-exempt products and services.
As a business owner, once your company sales exceed £67000 in a year, you must register for VAT. You may also register voluntarily before reaching this limit if you so wish.
The current standard rate of VAT is 20% for most items, however VAT is charged on goods at different levels depending on what they are. For example, there is a reduction rate of 5% for mobility aids, children's car seats and booster seats etc.
Some items are completely zero rated, for example safety equipment such as protective industrial apparel, hard-hats and cycle helmets. Baby and children's clothing and footwear is also zero-rated, as is the printing of leaflets and brochures.
How VAT works
To be able to charge VAT, your company must first be registered for it. You can charge VAT on such things as:
• business sales
• hiring out or loaning of goods
• selling off business assets
• items sold to staff
• business goods used for personal reasons
• bartering of goods or services, part-exchange and gifts (non-sales)
These are known as ‘taxable supplies’.
As a VAT-registered businesses, you will have certain responsibilities by law. You must charge VAT on all goods or services you supply, however you can reclaim any VAT that you have paid on business-related goods or services.
You must report to HMRC the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every quarter (3 months). You need to account for VAT on the full value of what you sell even when you receive goods or services instead of money, for example if you take something in part-exchange.
If you haven’t charged any VAT to your customer, whatever price you charge, HMRC will treat it as including VAT. If you’ve charged more VAT than you’ve paid, the difference will have to be paid to HMRC. However, if you’ve paid more VAT than you’ve charged on your goods and services, you can reclaim the difference back from HMRC.
What are the VAT rates?
You will want to make sure that you are going to charge the right VAT rates on your goods or services, especially when dealing with zero-rated items.
There are 3 different rates of VAT:
Standard rate (20%)
The standard rate of VAT applies to most regular goods and services, and you should charge standard rate unless you sell zero-rated items. It is worth getting a list of all zero-rated items currently listed in the UK to check if this applies to your business.
Reduced rate (5%)
This rate is applied to all goods and services falling into this category. You should charge this rate if you deal in children's car seats, booster cushions etc. Mobility aids for the elderly are charged at 5%, if they’re for someone over 60 years of age and the goods are to be installed in their home.
Zero rate (0%)
The rate of VAT you charge your customer for zero-rated items or services is 0%. These items include:
• books and newspapers
• children’s clothes and shoes
• motorcycle helmets
Despite selling zero-rated goods or services, you still need to record all your zero-rated transactions in your VAT accounts and report them on your VAT Return.
Remember that you cannot claim back all of the amount you have paid if you apply the wrong VAT amount to a sale. This is why it is important to charge the right rate of VAT from the beginning.
Gather all the information you need about what VAT rate you should be charging before you start trading, and make sure that you:
• charge the right rate of VAT for your products and services
• work out the VAT if a single price is shown that includes or excludes VAT
• show the VAT information on your invoice
• show the transaction in your VAT account - a summary of your VAT
• show the amount on your VAT Return
Check whether you are able to reclaim the VAT on purchases that relate to these sales.