This article tells you about that sometimes scary term ‘VAT’, and what it means for your business. If you’ve ever wondered what VAT obligations you have as a business owner, then here is a good place to start.
VAT stands for ‘Value Added Tax’. It is a tax on goods and services and businesses must pay it if their profits exceed a certain amount.
The standard rate of VAT is 20%, which has been increased from 17.5% from 2011. VAT hikes such as this have been linked to increased consumer borrowing including so-called ‘payday’ loan borrowing from providers like https://www.Wonga.ca as the cost of living continues to rise.
Registering for VAT
In the UK, companies that make over £77,000 in any period of one year must pay VAT. There is a statutory requirement that you register for VAT within one month of exceeding the amount of £77,000 which is referred to as the statutory threshold. Businesses making less than the statutory threshold can register for VAT voluntarily, and this has some advantages in that it allows for certain tax advantages and benefits to be claimed.
Businesses earning profits above the statutory threshold are expected to collect VAT on behalf of the government. Failure to do so can lead to prosecution, fines or other penalties. Most businesses add the cost of VAT onto their goods and services and then pass the charge on to the customer, clearly showing them that VAT has been added.
You are required to keep VAT records if your business is making a certain level of profit. This is so the government can check that you are paying the correct amount of tax.
VAT and Goods and Services
Not all goods and services are the same in terms of what VAT must be added. Some goods and services are exempt from VAT for example and some goods and services are classed as VAT reduced so they attract a lower level of VAT.
Different VAT categories
There are four categories goods and services and each has a special VAT rate. The four categories are (a) goods and services which are taxed at the standard rate, (b) goods and services which are taxed at a reduced rate, (c) goods and services taxed at a zero rate and (d) goods and services which are exempt from tax.
Adding VAT Businesses are required to keep records of VAT addition on their goods and services and a good way to do this is to keep invoices detailing the VAT charged on every sale. Businesses have to be careful to charge VAT at the correct rate though, so it is a good idea to familiarize yourself with what goods and services go into the different categories. In general the reduced rate of tax is charged on fuel or power, smoking cessation products and children’s car seats; the zero-rated tax applies to food and drink purchases (not meals in restaurants or hot food though) and books and newspapers. Products and services which are exempt include insurance, credit services and letting of land. The HMRC issue guidance on this subject and can be contacted for specific rates and information on this issue.