Turner Little explains how VAT affects a business. VAT is a tax the government requires the majority of suppliers to charge consumers on their products.
Registering for VAT
UK business’ whose annual turnover exceeds a certain threshold (£82,000 at present) are required to register for VAT. You can exempt the value of any capital assets e.g. equipment, buildings, vehicles, you’ve sold from this threshold. It’s vital that you register for VAT as soon as your business reaches the annual threshold, otherwise you will be forced to pay fines to the government. You can cancel your VAT registration if your annual turnover falls below a certain threshold currently (£80,000).
It’s important to note that it’s you as the director, not your company that registers for VAT and that this covers all areas of your operation and therefore you only need to register once. Also regardless of turnover, as of 1st April 2010 the government now requires all businesses to register for VAT online and pay their bill electronically. Remember that if you’ve never used HM Revenue and Customs’ (HMRC) online services before, you’ll need to register for an online account first.
It’s important to be aware that even if your SME’s turnover doesn’t reach the threshold, you can voluntarily register for VAT. This can actually save you money as VAT reflects turnover not profit; for some businesses it’s better to register early to avoid unknowingly eclipsing the VAT threshold and being forced to pay penalties. As part of our miscellaneous corporate services, Turner Little can handle your VAT registration, so you can ensure your company fulfils its tax obligations.
Charging VAT
Your business must collect VAT from the goods and services sold to customers and pay VAT on goods and services bought from suppliers. The majority of firms collect more than they pay; if this applies to you, you are required to pay the surplus to HMRC after you submit your quarterly VAT return. If you pay more VAT than you collect, you can submit a return to HMRC each month and claim a refund in most cases.
For the purposes of filling out your VAT return, remember that the tax you apply to the price of goods and services you sell to consumers is called ‘output tax.’ Meanwhile, the VAT you pay your suppliers for the goods and services you use to operate your business is called ‘input tax.’ This also includes VAT on things you buy to re-sell, payments for professional services e.g. accountant, raw materials, business equipment and business phone calls.
We should note if your supplies are bought by customers, who are registered for VAT, to operate their firms, they will register the tax you charge them as their input tax. Furthermore when charging VAT, you must do so at specific rates. These are:
- Exempt rate: This applies to supplies with no VAT. It includes the services of doctors and dentists with some exceptions e.g. osteopaths, insurance, finance, and education. If you only sell exempt supplies, you don’t need to register for VAT but if you sell some exempt supplies, you may have difficulty claiming all your input tax back from HMRC.
- Zero rate: This applies to supplies with a VAT rate of zero. It includes books, newspapers, prescriptions, children’s clothing and shoes as well as most food, with the exception of restaurant and takeaway dinners. If you only sell zero rate supplies you could be exempted from VAT registration, but you must apply to HMRC to receive said exemption.
- Reduced rate: This applies to supplies with a VAT rate of 5%. It includes fuel and power used in homes and by charities.
- Standard rate: This applies to all goods and services that aren’t covered by other categories, on which the VAT charge is 20%.
Keeping records
Under UK law, you’re required to keep meticulous VAT records, which must be easily accessible and up-to-date. If you register for VAT, you’re required to maintain records for six years. As part of these records, you need to include all your business’ transactions, as well as documents such as bank statements, receipts, bills and cheque stubs as evidence. Ensure you record all supplies your firm makes and receives, as well as a summary of VAT for every tax period covered by your VAT returns.
VAT imposes a number of obligations on your business. As an SME owner, you might be able to ease this burden by taking part in the government’s Cash Accounting Scheme for VAT. This is designed to make registering for VAT and submitting returns easier for SMEs whose VAT taxable turnover is less than £1.35 million. Ensure you have the financial infrastructure required to keep accurate VAT records. Turner Little provides the UK banking services you require to build a viable business.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agents, Registered Bank Intermediaries and Business Consultants, as well as Trust providers.