- What is VAT?
- Should my company be VAT registered?
- Will my company exceed the threshold?
- When should I register for VAT?
- What are the rates of VAT?
- How and when do I pay or receive VAT from HM Revenue and Customs (HMRC)?
- How do I account for VAT?
- What is the Cash Accounting Scheme?
- Important VAT Requirements
- How do I register my company for VAT?
- Useful links
What is VAT?
Value Added Tax (VAT) is a tax charged on most transactions in the UK. If you are a VAT-registered business, generally you charge VAT on your business sales and reclaim it on your business purchases. If you are not registered for VAT, you do not charge VAT on your sales. You do, however, still pay VAT on your purchases but you cannot reclaim this. The administration of VAT in the UK is managed by HM Revenue and Customs (HMRC).
Should my company be VAT registered?
VAT registration is compulsory if the VATable turnover of your company exceeds or is likely to exceed the government threshold of £85,000 for any rolling 12 month period. You can register for VAT on a voluntary basis at any point until your companys turnover exceeds this threshold.
VATable turnover includes goods and services you have sold that are liable to VAT at the standard, reduced and zero rates (see below), but does not include anything that is exempt or outside the scope of VAT.
Being VAT registered may also help you to form relations with other companies. Many larger companies often prefer to deal with other VAT registered companies as it can be an indication of their size and commitment to their area of business.
There are a number of other considerations to take into account when deciding whether or not to register for VAT. These are covered in the following sections.
Will my company exceed the threshold?
If you do not envisage that your company will turnover in excess of the threshold then you may wish to avoid becoming registered for VAT in order to simplify your accounting responsibilities. You must however be careful when making this decision as if during any period you exceed the threshold and you fail to register for VAT you may face financial penalties.
When should I register for VAT?
You can voluntarily register for VAT at anytime before you reach the threshold. Many new businesses that expect to turnover more than £85,000 per year choose to register before they commence trading. This means that they are not burdened with the administrative work associated with changing their accounting system and re-pricing their products and services later down the line. Many new businesses also invest a large proportion of their income and capital in establishing the company in the early stages - the advantage of being VAT registered from the onset means that the VAT paid on these expenses can be reclaimed.
You must register for VAT if:
- you think your turnover may go over the threshold within the next 30 days
- you take over a VAT-registered business as a going concern
- you are selling goods into the UK from another country in the European Union (EU) and exceed the "distance selling threshold"
- you acquire goods from other countries in the EU totalling more than £67,000 in a year and do not intend to use those goods to make VATable supplies
What are the rates of VAT?
It is important to remember that VAT is a tax that is calculated on the sale of the items you buy and sell through your business. Different rates of tax apply to different types of products and services. The standard rate for which most items apply is 20%. This means if you sell a product or service to a customer, they must pay an additional 20% on the sale price. In the same respect if you buy a product from a VAT registered business, 20% of the sale price will be calculated as VAT.
The main rates of VAT in the UK are:
- Standard Rate (20%) - Most goods and services
- Reduced Rate (5%) - Fuel and power used in the home and by charities, womens sanitary products etc
- Zero Rated (0%) - Certain products and services where VAT is not applicable e.g. stamps, children's clothing etc
How and when do I pay or receive VAT from HMRC?
A VAT return tells HM Revenue & Customs (HMRC) how much VAT you charged to your customers, how much VAT you paid to your suppliers - and the amount of VAT you must pay to HMRC or the amount of VAT you can reclaim from HMRC.
VAT returns are currently available in paper and online formats but HMRC plans to phase out paper VAT returns from 2010. From 2010, if your turnover is over £100,000 - or if you are newly VAT-registered - you will have to file your VAT return online and pay VAT electronically.
Most companies pay their VAT on a quarterly basis. Remember, however, that any VAT collected through your company must be accounted for separately from that of your normal sales revenue. The VAT you collect is not yours or your companys money, rather it is being looked after temporarily until you make your next payment to HMRC. Your companys VAT should be treated like a liability that is based on the net difference between the VAT you have collected and that VAT you have paid when purchasing goods and services for your company. It is this amount that must be calculated and paid to HMRC on a quarterly basis. If you are collecting large sums of VAT then you may wish to consider holding your VAT reserves in a high interest account.
At the end of each VAT quarter, a company must complete a VAT return form and send it to HMRC with the appropriate payment. The VAT return includes a series of boxes where you can input the total of the VAT collected on your sales and the VAT you are reclaiming on your purchases along with several other boxes for sales and purchases made in EC Member States. You can also now complete your VAT return online and pay by direct debit.
How do I account for VAT?
Using standard VAT accounting you pay VAT at the point of sale, ie, on any invoices you have issued, even if you have not received the payment from your customer. If, for example, you provide a 30 day credit facility for a customer purchasing a product or service from your company, your company will take on a liability to HMRC for the VAT amount of the sale once the invoice has been raised. And you reclaim VAT on any invoices you have received, even if you have not yet paid your supplier.
The easiest way to manage your VAT responsibilities is by using an accountancy program such as Sage Instant Accounts or Line 50. This type of software will enable you to maintain an account that you can use to track your net VAT liability. At the end of your VAT period the software will automatically show you what figures must be entered into each box on your return.
What is the Cash Accounting Scheme?
Using cash accounting for VAT, you pay VAT on your sales when your customers pay you, ie, when the funds change hands rather than when the invoice is raised. And you reclaim VAT on your purchases when you have paid your suppliers. This accounting system is particularly useful for companies that typically have a long period of time between issuing the sales invoice and receiving payment.
You can use cash accounting if your estimated turnover during the next tax year is below £1.35 million. You can continue to use cash accounting until your estimated turnover exceeds £1.6 million.
Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you:
- buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale
- import goods or acquire goods from other EU states
- remove goods from a Customs warehouse or free zone
- issue a VAT invoice and full payment is not due within six months
- issue a VAT invoice in advance of providing goods or services
Important VAT Requirements
When your company becomes VAT registered you must comply with the VAT regulations that affect your business. It is beyond the scope of this guide to provide a full analysis of the VAT regulations that affect a given business however here are a few of the key requirements:
- When you sell goods or services that incorporate a VAT charge you must supply your customer with a VAT invoice. Generally the VAT invoice should include the VAT amount paid, your companies VAT registration number, a unique invoice number and the date the invoice was raised.
- Generally you must retain all VAT records including invoices and receipts for a 6 year period. These may be required by law. Remember that a VAT receipt for a purchase you have made through your business is a right to claim back the VAT paid. Without this you legally have no right to claim back the VAT.
- If your business circumstances change, you must notify HMRC as this may affect your VAT registration. In most instances you must notify them within 30 calendar days to avoid any financial or other penalties. In some cases, however, this time limit is shorter.
- You must charge VAT on supplies made to the companys employees or inter-company transactions.
- You should not claim back VAT on personal expenses.
How do I register my company for VAT?
To register for VAT you will need to fill in one or more forms and submit them to HMRC for approval. Although the number of forms will depend on your individual circumstances, most businesses only need to complete one form - VAT 1 Registration Form (http://search2.hmrc.gov.uk/kbroker/hmrc/forms/viewform.jsp?formId=986). Once approved by HMRC, you will receive a VAT registration number and certificate. Most applications for VAT registration can be completed online.
There is no cost for registering your company for VAT. If you are registering on a voluntary basis then you must show intent to trade - HMRC will normally request invoices that have been paid by the company as proof that you are applying for legitimate purposes.
You may find the following links useful in answering any further questions you may have about registering for VAT:
- HM Revenue and Customs (HMRC) - The government agency responsible for the collection and administration of VAT. (Formerly Customs & Excise).
- Business Support Helpline - VAT - A Government help centre for small businesses.
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