VAT is a tax imposed on business transactions, affecting all sales and purchases. It is not a tax on your revenue or profits. Currently, most supplies have a VAT rate of 20%, although some products are taxed at 0%, 5%, or are exempt.

Key points about VAT:

• Businesses with VATable purchases must pay VAT, known as "input VAT."
• VAT-registered companies can reclaim input VAT from HMRC.
• VAT-registered companies must add VAT to their VATable sales, known as "output VAT."
• Companies making significant VATable sales must register for VAT.
• The VAT collected by VAT-registered companies is for HMRC.
• The difference between the input VAT reclaimed and the output VAT collected is paid to HMRC, usually quarterly.

For example, if a VAT-registered retail store sells a vase for £30, it must add 20% VAT (£6), making the total price £36. If the store bought the vase for £12 (£10 plus 20% VAT, or £2) from a VAT-registered supplier, it owes £4 to HMRC. This amount is the difference between the output VAT (£6) and the input VAT (£2).

For VAT purposes, goods and services are categorized into four groups:

1. Zero-Rated Supplies:
   • Include prescription drugs, books, children’s clothing, food, construction of new houses, and printed matter.
   • VAT rate is 0%.
   • Exports are generally zero-rated, but special rules and guidelines may apply.
   • Although no VAT is added, companies can still register for VAT to reclaim the input VAT paid on related purchases.
2. Standard-Rated Supplies:
   • VAT rate is 20%.
   • Most goods and services fall under this category.
3. Reduced-Rated Supplies:
   • VAT rate is 5%.
   • Include children’s car seats, residential conversions and some renovations, domestic fuel, and the installation of energy-saving materials in residences.
   • Despite the 5% rate, related purchases including VAT can be reclaimed, regardless of the VAT rate applied.
4. Exempt Supplies:
   • No VAT is added as these supplies are not VATable.
   • Businesses cannot reclaim VAT on related purchases.
   • Unlike zero-rated, reduced-rated, and standard-rated supplies, VAT does not apply to exempt supplies.
   • If a company only sells exempt supplies, there is no need to register for VAT.
   • This category includes insurance, finance, and many property transactions.

One of the major benefits of registering your business for VAT is the ability to reclaim the VAT you pay on related purchases. However, if your business primarily deals with the public and you start charging 20% VAT on your prices, you might lose customers.

Here are the conditions for VAT registration:

1. Mandatory Registration:
   • A business must register if its VATable sales have reached the registration threshold.
   • If your VATable sales have exceeded £85,000 in the past 12 months, you must inform HMRC within 30 days from the end of the month in which you exceeded the threshold.
   • If you expect your sales to fall below the threshold, you can request HMRC to allow you to remain unregistered.
   • If you expect your sales to exceed £85,000 in the next 30 days, you must register. For example, if your new company has already booked orders totaling £85,000.
2. Penalties for Late Notification:
   • You will be charged a penalty of approximately 15% of the VAT due on your first return for late notification.
   • Additionally, you must pay HMRC the VAT that you should have charged your customers.
3. Voluntary Registration:
   • Even if your sales are below the registration threshold, you can choose to register for VAT.
   • Voluntary registration might be beneficial if:
     • Your clients are VAT-registered.
     • You have zero-rated sales.
     • You plan to set up a business producing VATable supplies, allowing you to reclaim VAT on pre-trading purchases.
   • Proof of your intention to produce VATable supplies must be presented.
4. Deregistration:
   • Registered businesses can deregister.
   • A final VAT return must be completed upon deregistration. If the VAT due on stock and assets exceeds £1,000, output VAT must be accounted for.
   • If deregistering due to liquidation or selling your business, contact HMRC.
   • You can deregister if you anticipate that your VATable sales will be less than £83,000 in the next 12 months.

Understanding these guidelines will help you determine whether or not to register your business for VAT and the implications of doing so.

If you are required to register for VAT, you should apply to HMRC immediately.

• Start Charging VAT: The output VAT you owe to HMRC must begin from the date you are required to register, not from the date your registration is completed.
• Adjust Your Pricing:
  • Even if HMRC is still processing your application, your prices should reflect the VAT due minus the input tax you can reclaim.
  • If you choose not to change your prices to avoid losing customers, you must still pay VAT to HMRC. This VAT is calculated by considering VAT as included in the sales value. For standard-rated supplies, the output VAT is one-sixth of the total amount charged.
• Invoice Details:
  • On your invoices, indicate only the gross amount. Do not list the VAT number separately until you have been assigned one.
  • Inform your customers that appropriate VAT invoices will be issued once you are registered.

Once you have registered for VAT, your business must issue VAT invoices for all sales to VAT-registered customers.

However, this requirement does not apply to sales of zero-rated or exempt products unless they are included in sales of other VATable products. In such cases, the invoice must show separate totals.

Be sure to keep a copy of each VAT invoice for your records.

A VAT invoice must include the following details:

• An invoice number
• Your VAT registration number, name, and address
• The tax point and, if different, the issuance date
• The name and address of the customer
• Description of the products or services
• Type of supply, such as lease, sale, or rent
• Unit cost and the rate of VAT
• Quantity
• Any discounts
• The total amount excluding VAT
• Total VAT amount
• Total amount payable, including VAT

A VAT invoice is not required for sales to the public unless requested. For retail sales worth less than £250, you may issue a simplified invoice that includes:

• The invoice date
• VAT number, name, and address of the supplier
• Description of the supplies
• Rate of VAT
• Total VAT-inclusive cost

To claim back input VAT, you need a VAT invoice.

For Car Fuel:

• If the car is used solely for business purposes, reclaiming input VAT on fuel follows the standard procedure.
• If the car is used for both business and personal purposes, you can either:
  • Claim back VAT solely for the fuel used for business purposes, or
  • Claim back all the VAT and pay a “fuel scale charge”.

Non-Business Purchases:

• You cannot reclaim input VAT on non-business purchases.

Company Cars:

• Generally, you cannot claim VAT when purchasing a company car, and 50% of VAT on car leasing costs is disallowed unless the car is used solely for business purposes.

Exempt Supplies:

• If your business produces solely exempt supplies, it cannot register for VAT and cannot reclaim input VAT.
• If your business produces both VATable and exempt supplies, it is considered “partially exempt”. You can register for VAT and reclaim a portion of the input tax incurred.

Home-Based Businesses:

• You can reclaim a portion of VAT on some costs, such as business-related phone calls.

Imports:

• VAT on imports is treated differently based on the supplier's country.
• For products purchased from suppliers outside the EU, import VAT is charged at the same rate as in the UK, and you can reclaim this as input VAT if you have the proper documentation. Import duty paid cannot be reclaimed.
• For items purchased from suppliers in other EU countries, VAT is not paid upon arrival in the UK. Instead, the VAT due is considered “acquisition tax” when you file a VAT return and can be reclaimed as input tax on this return.

These guidelines help ensure you reclaim VAT correctly and in compliance with regulations.

Important Information About VAT Returns

Your business must pay VAT to HMRC every quarter. To manage your VAT efficiently, request VAT periods that align with your accounting year from HMRC.

If your business turnover exceeds £85,000, the VAT registration threshold, the HMRC initiative “Making Tax Digital” has been in effect since April 1, 2019. This means all VAT returns must be submitted using HMRC-compatible software.

Key Points:

• Online Filing and Payment: Businesses must file their VAT returns online and pay VAT electronically. The deadline for filing and paying online VAT returns is one month and seven days after the end of your VAT period.
• Accounting Records: The figures on VAT returns must come solely from your accounting records. These records should detail output VAT, input VAT, and payments to or from HMRC. Separate records must be kept for zero-rated, exempt, reduced-rated, and standard-rated supplies, as well as exports and imports.
• Digital Records: If your turnover is more than £85,000, you must keep digital records in a format compatible with HMRC-approved software to comply with “Making Tax Digital.”
• Bookkeeping: Using a simple bookkeeping system helps in completing VAT returns with less effort. However, if your business generates both VATable and exempt supplies, a more complex accounting system is required.
• Tax Points: Every purchase or sale has a tax point, which is the date used for VAT accounting:
  • The basic tax point is the date of supply.
  • If an advance payment is received or a VAT invoice is issued, the earlier date is the tax point.
  • If a VAT invoice is issued within 14 days of the supply date, the tax point is the invoice date.
• HMRC Inspections: HMRC may visit your business to check your records. If mistakes are found in your VAT returns, you might be charged interest and penalties.
• Error Correction:
  • If a miscalculation exceeding £10,000 is discovered after submitting the VAT return, you must send VAT 652 or a voluntary disclosure letter to HMRC, explaining the mistake and enclosing a payment for the VAT due. If VAT was overdeclared, request a repayment.
  • For miscalculations less than £10,000, adjust your subsequent VAT return but keep appropriate records to justify the entry.

By following these guidelines, you can ensure compliance and avoid penalties when managing your VAT returns.

Businesses should be aware of various accounting schemes that can help reduce administrative burdens, especially for small businesses. Regardless of the scheme chosen, the net amount of VAT payable remains the same.

Cash Accounting Scheme:

• This scheme is widely used by small businesses, including retailers.
• VAT is accounted for based on when cash is paid (for purchases) or received (for sales), rather than the tax point.
• It helps avoid issues with bad debts or late payments on credit sales.
• Any business can use cash accounting if the estimated VATable turnover for the next tax year does not exceed £1.35 million. Businesses can continue using the scheme until their VATable turnover reaches £1.6 million.
• For businesses using the scheme from the start, VAT on pre-registration purchases should be claimed during the first VAT return to avoid blockage of claims.

Annual Accounting Scheme:

• Only one VAT return is required each year under this scheme.
• VAT payments are made quarterly or every nine months based on an estimate of the annual VAT bill. A balancing payment is made upon submitting the annual return.
• Businesses with an estimated VATable turnover of up to £1.35 million can use this scheme and continue until their turnover reaches £1.6 million.
• Businesses falling under the threshold can start using the scheme from the date of VAT registration.

Flat Rate Scheme:

• Individual purchase transactions are ignored, and input VAT cannot be reclaimed unless it is for a single capital item costing over £2,000.
• VAT payable to HMRC is a fixed percentage of VAT-inclusive turnover based on the business category, ranging from 4% to 14.5%. This is reduced by 1% in the first year of VAT registration.
• If the amount of direct goods is less than £1,000 per year or 2% of VAT-inclusive turnover, the business is classified as a “limited cost trader” and a 16.5% flat rate applies. Ensure that only “relevant goods” are included to remain eligible for a lower rate.
• Normal VAT invoices with standard VAT rates are still issued.
• The scheme applies if the estimated VATable turnover does not exceed £150,000 in the next 12 months. Businesses can remain on the scheme until their total income exceeds £230,000.

Reverse Charge VAT Scheme:

• Introduced on March 1, 2021, for the construction industry to combat "Missing Trader" fraud.
• Under this scheme, the customer, rather than the supplier, accounts for VAT on labor.
• It does not apply to domestic customers or the final business but to sub-contractors supplying workers to a main contractor.

Understanding these schemes can help businesses manage their VAT obligations more efficiently and reduce administrative overhead.