Ever seen an offer that lists ‘costs + VAT’? If you thought prices were pretty reasonable until you did the math (then had a small heart attack), you’ll know just how much those three letters can bite. The reverse is true of duty-free purchases (though one can spend a small fortune at the airport all the same).
VAT can work for or against a consumer. The same love-hate relationship applies to sellers. While paying VAT on all your transactions can feel painful, being registered for VAT has its advantages as well.
In this blog, we’ll walk you through all things VAT - including why registering for VAT is ultimately worth the effort.
What is VAT?
VAT (or value-added tax) is a levy on goods and services. Currently sitting at 20% in the UK, VAT is commonly already included in standard pricing. However, some vendors choose to list it as a separate cost (£X + VAT). How it’s advertised is irrelevant considering it all goes to the same place: HMRC.
VAT was first introduced to the UK in 1973 when it joined the European Economic Community. While there is a standard rate to adhere to, it has fluctuated over the years. In 1974, the standard VAT rate dropped from 10% to 8% and held this position for 5 years. In 1979, however, it soared up to 15%. The standard rate then yo-yoed between 15% and 17.5% until 2011, when it settled at the current rate of 20%.
Standard rate of VAT
Lucky us, right?
The good news is that some goods are considered ‘essential’ by the government. The vast majority of food products, books, newspapers, and some clothing items (such as children’s wear) come under the Zero rate - meaning no VAT is charged. There’s also a Reduced rate (5%) for certain products (such as children’s car seats).
The UK government also recently announced a reduced VAT rate for the hospitality and tourism sectors. From 15 July 2020 to 30 September 2021, the VAT rate will be reduced from 20% to 5% - after which an interim VAT rate of 12.5% will continue to run from 1 October 2021 to 31 March 2022 (great news and a much-needed boost for both these industries)!
Should I be VAT registered?
If your business has an annual turnover (or projected turnover) of £85,000, VAT registration is compulsory. No ifs, ands or buts. If you don’t do this, you’ll end up liable to repay all VAT due anyway - plus a penalty fee percentage. It’s a no-brainer, really.
However, many business owners choose to register for VAT despite being under the threshold.
Is it worth voluntarily registering for VAT?
“Why would I do that to myself?” We hear you asking. Good question!
Here are two key reasons for considering voluntary VAT registration.
1. It helps legitimise your business
Bridie Gallagher, Managing Director at Glass Digital, sheds more light on this topic. “Some businesses also choose to register before their turnover reaches the VAT taxable threshold for other reasons, too.” Bridie tells Addition, “For one thing, it can be seen as a positive step for scaling up your company, as it shows your intention to build and grow your business. It can also make your company more tax efficient.”
2. It can save you money
“You may be able to reclaim any VAT you have paid on business-related goods or services, which can reduce your quarterly bill when submitting your returns.” Bridie explains, “If you aren’t VAT registered, you’ll still have to pay VAT on your purchases, but won’t be able to reclaim it - that's why it’s well worth considering voluntary registration.”
Admittedly, there are some downsides to being VAT registered - like having to charge your clients more. Most people expect to pay VAT, so this is not an issue. Also, if your clients are a VAT registered business, they’ll qualify for zero-rate VAT - meaning everyone’s a winner.
How can I register for VAT?
There are three ways to do this.
Via a third party
Whichever method you choose, you’re going to need:
● Your Unique Tax Reference (the ten-digit number you use to pay Corporation Tax)
● Your company number and address of registration
● Details of any associated businesses dating back 2 years
● Your business bank account details
You can read more about what registration entails here.
How and when do I pay VAT?addhub
VAT is normally paid quarterly (every 3 months) or annually to HMRC. The only exception to this is a business with a less-than-stellar track record for on-time VAT payments (in which case, they’ll pay monthly).