Money Matters (Part 5) – VAT

VAT – Everyone has grown to love to hate it. Whether you’re an employer or self-employed, the processes involved in registering for VAT can be challenging and frustrating. That being said, we thought we’d provide you with everything you need to know so that any processes you go through in the future are plain sailing.

What is VAT?

VAT, or Value Added Tax, is a tax charge on goods and services in the UK, which are considering to be luxury items. It is also charged on goods and some services that are imported from outside the European Union (EU) and brought into the UK from other EU countries.

People often refer to VAT-registered businesses as mini tax collectors. They charge customers VAT on top of their sales price, collect the cash and then pay it over to HM Revenue & Customs – minus any VAT they’ve incurred on their purchases.

Who can and can’t register for VAT?

If you are wanting to register for VAT, you can do so only if you’re part of a business. Here, the individual or organization that is in the business would be known as the ‘taxable person’. Furthermore, in order to register for VAT, you must also be one of the following:

·      An individual

·      A partnership

·      A company

·      A club

·      An association

·      A charity

·      Any other organisation or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc.

·      A trust

·      A Local Authority

There are only a few exceptions where you can’t register for VAT, these being:

·      You sell only goods or services that are exempt from VAT

·      You aren't in business according to the definition that HM Revenue & Customs (HMRC) uses for VAT purpose

You can find out more about exempt and partially-exempt businesses for VAT purposes here. - http://www.hmrc.gov.uk/vat/managing/reclaiming/partial-exemption.htm

When to register for VAT

You are required to register for VAT when you go over the £81,000 threshold, or if you know that you will in a 30-day period. The threshold is based on your VAT taxable turnover, which is defined as the total of everything sold that isn’t VAT exempt. Similarly, you may also need to register for VAT if you take over an existing business that is VAT-registered.

However, if you or your business is not based in the UK, then there is no threshold. Though you must register as soon as you supply any goods and services to the UK (or if you expect to in the next 30 days).

There is also an obligation to register if you think your business’ turnover will exceed the threshold within just 30 days, but for most businesses, this would not apply. There are other scenarios when VAT registration becomes compulsory, for instance if you are trading outside of the UK.

Failure to register on time may lead to late registration penalties and/or ‘failure to notify’ penalties. Furthermore, surcharges and interest are likely to be charged for late payment if the business has a VAT liability. If your business’ turnover exceeds the VAT registration threshold temporarily, you can ask HMRC for an exception from registration.

If the taxable turnover of your business does not exceed the current VAT registration threshold, you can still register for VAT voluntarily.

There are two main reasons why a business might opt to register for VAT:

·      Customers are predominately other VAT-registered businesses and therefore any VAT they are charged can be recovered, so it makes no difference to their customers whether they are VAT registered or not

·      They are often in a refund position with HMRC, so the business is actually better off being VAT registered.

The different rates of VAT

Name	Current rate	Description and examples
Standard	20%	The standard rate of VAT is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated.
Reduced	5%	Domestic fuel and power, installation of energy-saving materials, sanitary hygiene products, children’s car seat, etc.
Zero	0%	Food (not meals in a restaurant or hot takeaways though), books/ newspapers, children’s clothes/ shoes, public transport etc.
Exempt	Not applicable	The law stipulates that exempt items must not have any VAT charged on them. Examples include insurance, providing credit, education, fundraising, membership, etc.
Outside the scope	Not applicable	Items that are completely outside of the UK VAT system. Examples include drawings, wages, MOT tests, rates, etc.