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Beginner’s guide to VAT

VAT is a complex area of tax; it can be difficult to figure out how it works and what you need to do. In this beginner’s guide to VAT, we translate the jargon and highlight some key areas you need to be aware of.

What is VAT?

VAT stands for ‘Value Added Tax’. It is classed as a ‘consumption tax’ and placed on almost all sales of goods and services. This amount is then passed to HMRC as part of the business’ VAT returns.

Do I have to register for VAT?

It is not compulsory to register for VAT if you are a limited company. However, it is compulsory to register if your taxable turnover reaches the registration threshold – currently £90k in a 12-month period (or if you expect to go over £90k in the next 30 days). If either of these apply and you don’t register in time, HMRC may issues fines/penalties. However, there are more things to consider besides the threshold when weighing up whether to register for VAT.

Should I register for VAT if I’m below the threshold?

If your taxable turnover is below the registration threshold, you can register voluntarily for VAT. It may be worth doing this if: ­­

  • You mainly sell to VAT-registered businesses: Being VAT-registered won’t increase your base cost to them as they can reclaim the VAT on your invoices.
  • You buy lots of items/services that include VAT: You can reclaim the UK VAT on your expenses, effectively reducing the cost to the company.
  • Your sales are zero-rated: The VAT on your invoices will be 0% and you can reclaim the UK VAT on your expenses.
  • You don’t want people to know your business is small enough to be below the threshold.

If your clients are all non-UK-based businesses or all your sales are exempt from VAT, (strictly speaking) you won’t be eligible to register for VAT.

I’m registering for VAT, what do I need to consider?

If you register for VAT, there are a range of different schemes available to you. The most common are:

  • Standard scheme – Generally VAT is recorded when invoices are issued, rather than when they are paid. This is usually the default scheme a company will use.

  • Cash accounting scheme – VAT is recorded when payments are made or received. This may be helpful if your customers are slow to pay.

  • Flat rate scheme – Instead of adding up the VAT on all your sales and deducting the VAT on your purchases, you simply pay a flat percentage of your total gross income. Read more on the Flat Rate Scheme.

  • Margin scheme – This is for sellers of second-hand goods.

How much VAT do I add?

You need to consider which VAT rate will apply to the services or products you’re supplying. The infamous case around Jaffa Cakes ‘is it a cake or is it a biscuit?’ wasn’t about whether you should be dunking a cake in your cup of tea, but which VAT rate applies to the product.

In the UK, the VAT rates that can apply to taxable turnover are 20%, 5% and 0%. For a typical VAT-registered freelancer/contractor, you will probably charge VAT at 20% to your UK clients.

If you are providing non-digital services to non-UK-based customers, then the VAT charged will depend on whether this is being supplied to a business (B2B) or an individual (B2C) as the ‘place of supply’ is different for each.

  • For B2B transactions no VAT is charged as the ‘place of supply’ is where the business customer is located.

  • For B2C transactions, VAT is charged at the normal rate for the service as the ‘place of supply’ is where the supplier is located (i.e. the UK).

What do I need to do?

As with most taxes, there are returns to be filed and liabilities to be paid.

VAT-registered businesses typically file quarterly VAT returns (i.e. every 3 months) which record the UK VAT on your income and expenses during the period. The VAT quarters won’t necessarily align with the calendar year or the company’s accounting year-end.

The quarter-end dates will be the final day of the month of the quarter you are given. You can find this on your VAT certificate, which HRMC issues to you. It will be one of these:

  • January, April, July and October
  • February, May, August and November
  • March, June, September and December

The deadline for filing and paying any liability is one month and seven days.

For example: The The liability due on the return will be the difference between the VAT charged on your invoices and the UK VAT you reclaim on your expenses.

For example: The company issues invoices for £1,000+VAT, with a VAT rate of 20%. Your client pays £1,200. The additional £200 is owed to HMRC as part of the VAT return.

In the same VAT quarter, you have business expenses of £100+VAT, making £120 in total. The £20 VAT can be reclaimed through your return.

The net amount of the two figures £180 (£200 – £20) is your VAT liability for the quarter. This is how it would be recorded on the VAT return:VAT quarter ends 31 January. You must file your return and pay any amount due by 7 March.

You must submit a return every quarter, even if there are no transactions in the period. Failing to file the return on time or pay any liability can lead to penalties and late payment interest on the amount the company owes.

How does it work in practise?

The liability due on the return will be the difference between the VAT charged on your invoices and the UK VAT you reclaim on your expenses.

For example: The company issues invoices for £1,000+VAT, with a VAT rate of 20%. Your client pays £1,200. The additional £200 is owed to HMRC as part of the VAT return.

In the same VAT quarter, you have business expenses of £100+VAT, making £120 in total. The £20 VAT can be reclaimed through your return.

The net amount of the two figures £180 (£200 – £20) is your VAT liability for the quarter. This is how it would be recorded on the VAT return:

Example VAT return screenshot

In some instances, the amount of VAT you reclaim will be greater than the amount charged in the quarter. This will result in the return being in a ‘repayment position’, which HMRC will pay out to the company.

How can Maslins help?

We know that navigating the complex world of VAT can cause headaches (and in some cases financial penalties).

As one of our clients, all your VAT returns will be reviewed to ensure they are compliant before filing. We also send reminders when filing deadlines are around the corner.

Our team of friendly experts are online and on the phone, ready to answer all your questions – from basic queries to more complex conundrums. Get in touch, we love talking tax, accounting and VAT.

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