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Value Added Tax (VAT) is charged upon sales throughout the European
Union (EU). Currently, any business that has a taxable turnover of over £55,000
per annum must register for VAT as soon as their turnover exceeds this amount
or as soon as the business can forsee that it will. To do this you must fill in
and return Form VAT1, obtainable from:
HM Revenue & Customs (HMRC).You must register within 30 days of the end of the 12 month
period in which the limit was exceeded, or if your taxable supplies will go
over the limit in the next 30 days. Businesses should monitor their turnover on a monthly basis, as
failure to register could result in penalties. HMRC include incorporated
partnerships and sole-traders in their definition of a 'business'. Provided
that commercial turnover exceeds £55,000 pa the business falls under the scope
of VAT. What is VAT charged on?VAT is calculated on
the value of the goods or services supplied to the customer - this is called
output tax. Businesses will also have paid an element of VAT on purchases and
expenses - this is called input tax. At the end of each VAT quarter, input tax
is offset against output tax to calculate the exact amount of tax payable to
HMRC. Businesses can only start to charge VAT once they are registered. VAT paid on services supplied before registration may also be
recovered as long as they relate to taxable supplies made within six months of
registration. This is an incentive to register earlier rather than
later! What is VAT paid on?Some services are exempt
from VAT; this means that if all the goods or services supplied by your company
are exempt you cannot register. This also means that you cannot claim VAT back
on any of the goods or services you have bought for your business. The main
items exempt from VAT are:- Financial services
- Insurance
- Certain training and education
- Most health care
- Postal services
- Gaming and betting
- Membership benefits from trade unions and professional
bodies
- Most sales, leases and lettings of land and buildings (but not
lettings of garages, parking spaces or holiday accommodation)
At what rate is VAT calculated?The standard
rate for VAT is 17.5%, the special rate of 5% is charged on fuel and there is
also the zero rate. The government outlines items that fall under the zero
rate. Be careful not to confuse zero rated items and exempt items. You cannot
claim input VAT back on exempt category items, however you can on zero rated
items. Once a business is VAT registered it should expect a visit from an
inspector. This usually happens within the first three years. The inspector
should not appear unannounced, so businesses have time to make sure that all
their records are in order. HMRC have detailed guidelines and procedures on the
conduct of visits. If you have all your records in an orderly fashion, they
aren't to be feared! Tips to rememberNew businesses often have a
period of high expenditure at startup, and low sales. This means that input tax
(on costs) may be greater than the output tax (on sales), meaning that you will
get a repayment from HMRC. This helps cash flow and may make the administration
of VAT worthwhile.If you are a small business with low volumes, making sales on credit,
consider using the
Cash Accounting Scheme. This means you only need pay the VAT on your
sales in the quarter in which you get paid (rather than in the quarter you
raise the invoice). There is a certain benefit for self-employed individuals to register
for VAT since having a VAT number confers a certain 'stamp' and infers that you
have a minimum turnover, that you are keeping accurate accounts and that there
is a level of compliance enforced by the VAT inspectors. VAT registration is of course not an endorsement nor a substitute for
credit checking. If you're using freelance help or contractors, you can be
confident paying them via an invoice rather than having to pay them under PAYE
since they're clearly registered as a business.
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