The majority of people have heard of VAT. What many people do not realise is that VAT accounts for one-third of all government revenue. So, in fact, it impacts not just businesses, but each of us on a daily basis, in numerous transactions that we do (both online and on our high street). Despite its significance, VAT is one of the least understood taxes.

VAT becomes part of the cost of the purchase price for the average customer, and we rarely think about it. Businesses, on the other hand, have a different perspective on VAT. VAT is frequently profit neutral for businesses, but it is a crucial part of their operations, and failing to account for it correctly can lead to major problems. As a result, this advice is geared toward companies rather than the general public.

What exactly is VAT?

VAT, or Value Added Tax, was implemented in the United Kingdom in 1973. It is a tax levied on the purchase price of some products, services, and other taxable items purchased and sold within the United Kingdom. It is consistent with, but now separate from, the VAT system used throughout the European Union.

What is the VAT rate?

There are 3 rates of VAT chargeable in the UK and each rate depends on the goods or services being provided. The table below sets out these rates and what they generally apply to.

VAT, on the other hand, does not apply to all sales, and some are either exempt from or beyond the area of VAT. Insurance, health care, postal stamps, and education, for example, are excluded, but statutory fees, products or services purchased and used outside the UK, and charitable donations are not.

What is the VAT threshold?

If your taxable turnover reaches £85,00, you must register for VAT. Taxable turnover is defined as all turnover generated by non-VAT exempt sales. Even turnover with a zero-percentage-point VAT rate is considered taxable.

Companies who do not meet this criteria are exempt from charging VAT on their goods or services and are not required to register with HM Revenue & Customs (HMRC).

If a company’s turnover exceeds the threshold, it must contact HMRC and register for VAT.

This turnover requirement is calculated over a rolling 12-month period rather than a specific period such as the fiscal or calendar year. As a result, it might be any 12-month period, such as the beginning of June to the end of May.

It is critical for unregistered enterprises whose turnover is approaching the registration limit to keep a careful check on this on a frequent basis, as there are severe deadlines for submitting the registration and charging VAT once the turnover level is reached.

Registering for VAT

In this sense, VAT applies to any business form, including corporations, partnerships, and sole proprietorships.

HMRC will provide a VAT registration certificate upon registration, confirming the company’ VAT number, effective date of registration, and due date of the first VAT return.

It should be noted that any firm with a turnover less than the threshold might opt to apply for VAT through a process called as voluntary registration. There may be benefits to voluntary VAT registration, such as the possibility to recover VAT on purchases and projecting a more trustworthy and professional image to clients.

Accounting for VAT

Once registered, a firm must include the applicable VAT rate on all taxable sales. This is known as an output tax. The VAT is ultimately paid by their consumers, but it is the obligation of the firm to declare and pay this to HMRC.

Businesses can often refund VAT paid on business-related purchases, generally known as input tax. However, some products are not eligible for VAT reclaims, such as entertainment charges, vehicles, and purchases made for personal use (for unincorporated enterprises).

How to calculate VAT

VAT calculation is easy. To get VAT-inclusive pricing, just multiply the price without VAT by 1.2, which adds the typical 20% VAT rate to the price. Simply multiply the price (without VAT) by 1.05 to get the 5% lower rate of VAT.

To determine VAT-exclusive pricing, multiply the total price (including VAT) by 1.2 for the regular (20%) rate or 1.05 for the reduced (5%) rate.

What is a VAT return?

VAT registered firms must submit a VAT Return to HMRC to disclose the amount of output tax and input tax. This is typically conducted once a quarter. Most VAT registered firms with a turnover of more than £85,000 must also follow the Making Tax Digital (MTD) for VAT requirements, which went into effect in April 2019.

What is my VAT number?

A VAT Number, also known as a VAT Registration Number, is a one-of-a-kind identifier assigned to a VAT-registered business. This number is 9 digits long and will likely begin with GB. HMRC will give a VAT registration certificate to a firm, which will include their VAT number.

When submitting VAT returns, it is critical that your VAT number is verified. Errors in your VAT return might create delays, and HMRC may reject your tax input claim.

How to check if a company is VAT registered

You may use a service on the UK Government website to determine whether a UK firm is VAT registered. This tool allows you to check the validity of a VAT Registration number as well as seek for the business name and location to which the number is registered. It may also be used to keep track of the times you checked a UK VAT number.

VAT Penalties

VAT registration is a legal requirement; failure to comply with these laws can result in significant fines and, in the worst-case scenario, incarceration.

The penalty assessed by HMRC for late registration is calculated as a percentage of the VAT owed (output tax less input tax) from the date a firm should have registered to the date HMRC received your notification or became fully aware that you were obliged to register. The penalty rate is determined by how late you registered:

HMRC may also levy surcharges if the VAT return or complete payment for the VAT owed is not received by the deadline. These surcharges might be up to 15% of the unpaid VAT at the due date. They also have the authority to charge fines of up to 100% of any tax under-stated or over-claimed if a firm delivers a return with a careless or malicious error.

The preceding is intended to be a brief overview of VAT, but the truth is that the scope is far broader and may be highly intricate. We haven’t even begun to discuss partial exemption or VAT margin strategies. HMRC takes VAT compliance seriously, therefore firms must account for VAT appropriately. As a result, expert guidance is strongly advised.

How to claim VAT back?

VAT may be reclaimed on items and services used only by your company, such as computers, office equipment, transportation, and third-party vendor charges (such as accountants).

VAT cannot be reclaimed on goods and services purchased for personal use, nor can it be reclaimed on corporate entertainment expenses.

Reclaiming VAT necessitates the submission of a quarterly VAT Return. This requires you to compute the difference between the amount of VAT paid by your business and the amount of VAT charged by your business during an accounting period.

The procedure of recovering VAT is complex, with several exceptions, exclusions, and caveats to consider. As a result, we highly advise you to consult with a certified business tax specialist.

What items are not subject to VAT?

Many commodities and services are free from VAT; nevertheless, certain items within a goods or services category are frequently VAT charged.

Meals and drink, for example, is normally zero-rated for VAT; however, hot food, crisps, alcoholic beverages, confectionary, and soft drinks are exceptions. Many of these exceptions have their own exceptions!

There are simply too many individual goods to mention here, but we recommend consulting a VAT professional for a more in-depth look at which items are VAT free or zero-rated.

Do charities pay VAT?

Any business that makes sales that exceed the UK VAT threshold must register for VAT, this can include charities and their trading subsidiaries. VAT registered charities must charge VAT on any standard or reduced rated goods and services sold.

Charities may be able to claim VAT relief on certain goods and services; they may also be able to reclaim some of that VAT from HMRC. It is recommended that charities consult a tax expert to determine whether they qualify for either of these.

What about properties and VAT?

Property-related transactions might be exempt, zero-rated, reduced-rated, or standard-rated in terms of VAT.

Purchases and sales, residential, commercial, or charity structures, construction, refurbishment, and conversion might all be subject to different restrictions. There is some leeway with commercial property in some situations, but it is critical to choose the right strategy from the start since there are possible problems.

Because property transactions are often large in value, getting the VAT treatment incorrectly may be costly.

Different areas of VAT

VAT is complex and covers many areas of operation within a business – each of these includes specific (often complicated) considerations that businesses must make in order to avoid issues.

• Land and Property VAT
• VAT and Construction
• VAT on Imports and Exports
• VAT when buying or selling a business
• VAT on international services

How to get VAT advice

VAT is still one of the least understood taxes, which is why we established a specialised VAT consulting section to help businesses navigate the intricate maze of VAT regulations.

Our staff assists with all aspects of VAT, from initial registration through the filing and submission of VAT returns, as well as advise on how to repair errors and mistakes, to more complicated issues such as assessments, control visits, cross-border transactions, and DIY house projects.