Introduction to VAT

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Introduction to VAT

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Why should you read this guide?

VAT is a business tax that provides you with a difficult question when you start in business - should I register for VAT or not? Bearing in mind that registering will probably mean that you need to pay tax, the question is not as easy to answer as you may think. This guide should help you make a more informed decision.

Background

VAT is a tax on the sale of goods or services either between businesses or business to consumer. In general we think of VAT as being a 17.5% charge but there are reduced rates and some goods are zero-rated. The 17.5% is charged by the seller who then pays this amount across to HMRC usually on a quarterly basis. If your business turnover in any 12-month period is going to exceed the minimum threshold (see link below for current figures) then you have no option but to register. If it is not likely to exceed you may still want to register.

Non financial implications

The decision whether to register immediately may depend on your target customers. For example if your customers are mainly individuals they will not be able to reclaim VAT. This will mean that the cost of your product or service may appear more expensive than your competitors as you need to add 17.5% onto it. If you are dealing mainly with businesses then your customers may prefer you to charge VAT as they can then offset this cost against their own VAT return. Being VAT registered also makes your business look bigger and perhaps more successful in the eyes of your customer.

Financial implications

As soon as you register for VAT you need to add an amount of VAT onto every invoice that you issue. This does not mean that you earn more money from this sale as you are simply collecting this tax on behalf of HMRC. The amount needs to be shown on the invoice as VAT and you need to put your VAT registration number on each invoice. On a quarterly basis you need to calculate the amount you are due to pay in VAT or in some circumstances the amount you can reclaim from HMRC. To do this you add the amount of VAT that you have collected and deduct the amount of VAT that you have paid on invoices. The amount that is left needs to be paid to HMRC by the end of the following month.

Registering

If you have decided to register or that you need to register then you must complete a VAT registration form. This is a straightforward process and can either be done online or by downloading a form from the HMRC website. In most circumstances there is only one form to complete but in some cases e.g. partnerships there may be additional forms to complete. Once you have submitted your form you are issued with a VAT registration number that needs to be put on all your invoice documentation. HMRC will then send you a quarterly return form that must be sent along with your payment.

Summary

VAT registration is a simple process. Working as a collector of taxes takes a bit of getting used to. Most businesses will treat the additional income as cash available to use in their business. This of course causes problems when you need to make a quarterly payment. Good practice would be to open a second bank account to deal with all VAT payments. This would allow you to keep this cash separate until you need to send it to HMRC.

Further information

Your accountant will be able to advise you on your liability for VAT and further information is available from www.hmrc.gov.uk/vat