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).
If you’re paying VAT quarterly, you’ll need to file your VAT return one calendar month plus 7 days after the end of every quarter. For example, if you’re submitting your VAT return for Q1 which ends 31st of March, you’ll file on the 7th of May.
Filing on time - and with proper supporting documentation - can get tricky. This is one of the key drivers behind HMRC’s new Making Tax Digital scheme. MTD requires businesses and the self-employed to keep digital records which are sent directly to HMRC. This software-based approach helps automate payments and avoid missed deadlines (and the accompanying fine).
Businesses who use the Annual Accounting Scheme can file their VAT return once a year. If you do this, you’ll also make an advanced payment on the following year’s VAT, which is based on your last return.
How much will I have to pay?
In theory, all the VAT you’ve charged your clients belongs to HMRC. For this reason alone, it’s absolutely essential that you set this 20% aside on all VAT-worthy transactions.
“My advice is to treat VAT as money that is not 'yours'.” Bridie explains, “It's a tax collected by HM Revenue and Customs, so it never belongs to you. It can help to separate any VAT collected and put it aside in a different bank account until it’s time to pay.”
Although all VAT on customer purchases is owed to HMRC, you are also allowed to claim back the VAT you’ve paid on business purchases (as long as you have a VAT-valid receipt)!
If it turns out you’re due a VAT repayment, HMRC will usually get this to you via bank transfer within 30 days.
WANT SOME HELP WITH THAT?
It’s worth knowing that company VAT claims can be backdated by up to two years (for services) and four years (for goods).
Addition offers full-suite financial services to small businesses and startups - from bookkeeping to growth funding. Our tailored plans grow with your business, eliminate the need for a full-time finance team, and give actionable insights to get you further, faster! Hop on a call and let us make it all add up.