Value Added Tax is a type of general consumption tax, which is charged on the purchase of a good or service provided by UK companies. VAT is collected on behalf of HMRC by companies and is typically paid to HMRC on a quarterly basis. Watch our video to learn more about VAT and how it works.
How is VAT calculated?
VAT registered companies must charge VAT on the goods and services they provide and can reclaim any VAT they have paid on any purchases for the business.
If you have charged more VAT on sales then you have paid on purchases, then you have to pay the difference to HMRC. Alternatively, if you have paid more VAT on purchases than you have charged on sales you can reclaim the difference from HMRC.
This is done via your VAT return which is usually due every 3 months.
When do I need to register for VAT?
You must register for VAT with HMRC if your business’ turnover is more than £85,000 in a 12 month period or if you expect your turnover to go over this amount in a single 30 day period.
You must also register for VAT even if you only sell goods or services that are exempt from VAT, but you purchase goods for more than £85,000 from EU VAT registered suppliers.
You can also register for VAT voluntarily if your turnover is below £85,000. This may be tax efficient if you purchase more VAT-able products then you would expect to sell.
How do I register for VAT?
The quickest way to register for VAT is online.
If you go to www.hmrc.gov.uk, you can create a government gateway account with HMRC, which you will need to submit your VAT returns. You can also add additional taxes to this account including corporation tax, income tax and PAYE.
If you can’t register online, you can also register by post by downloading a VAT1 form HMRC’s website.
An even easier way is to appoint an accountant to complete the VAT registration for you. They deal with VAT registrations daily and may be able to help with choosing a specific scheme which is tax efficient for your company.
Once you have registered for VAT, you will be sent the following information:
- Your VAT number
- Dates when you need to submit your first VAT return and make a payment
- Your ‘effective date of registration’. This is the date you either went over the VAT threshold of £85,000 or the date you voluntarily asked to become VAT registered
From this effective date of registration, you are responsible for charging the right amount of VAT on sales, paying any VAT due to HMRC, submitting your VAT returns on time and keeping VAT records.
What else do I need to consider?
Different VAT schemes
Usually your VAT returns and payments are submitted to HMRC every quarter, and you calculate VAT received on sales less VAT paid on expenses. However, you may be eligible to apply for one of the following schemes:
- Annual Accounting Scheme – Where the VAT period is one year and you make advance VAT payments towards your VAT bill throughout the year, which is either based on your last VAT return or estimated if your newly VAT registered company. You can only apply for this scheme if your estimated turnover is less than £1.35 million
- Flat Rate VAT Scheme – where you pay a fixed rate of VAT to HMRC. This rate will depend on your business type. You keep the difference of VAT charged from sales less VAT paid to HMRC. However, you can’t reclaim VAT on purchases apart from capital assets over £2,000. To join this scheme your annual turnover must be below £150,000. There are further restrictions on joining this scheme, it is best to check with your accountant if you are eligible.
There are also a number of other schemes, for example covering Travel Agents and Motor Trades. It’s worth checking or speaking to an expert.
What records do I need to keep?
You must keep your VAT records for 6 years either on paper, electronically or on accounting software and you must have a VAT invoice in order to reclaim the VAT. If HMRC were to look at you, you could be fined if your records aren’t kept in order. We would recommend using an accounting software such as Xero to keep your records safe.
Whether, you are registering for VAT because your turnover is above the threshold or you are voluntarily wanting to register, it is best to get some advice from an expert, such as your accountant on the different schemes and rates of VAT.
I hope you found that useful. If you want to know more about VAT, we do have a number of videos, including ‘what do I charge VAT on’ and ‘what expenses can I reclaim vat on’ or feel free to get in touch with us.