Business VAT

Need help understanding business VAT? Company Formations 24.7 can register your company for VAT and PAYE at the time of formation to make life easier.

VAT stands for Value Added Tax, and is a tax levied on goods and services.

You must become a VAT-registered business in order to add this tax, and you need to do this if you are approaching the VAT threshold, which is set for the 2015-16 tax year as £82,000. If your company turnover has reached £82,000 within the past 12 months, or you anticipate that it will do so within 30 days, you must register for VAT. You will then need to fill in a quarterly VAT return, and pay the required sum to HMRC.

A formation agent can carry out VAT registration on your behalf, saving you time and hassle, and ensuring you remain compliant from the start.

How much is VAT?

There are three rates of VAT – standard, reduced, and zero.

The standard VAT rate is currently 20%, meaning that you should add a further 20% to the cost of goods or services provided by your business. Some items are subject to a reduced rate of VAT at 5%, such as fuel and home energy services, children’s car seats, mobility aids, and energy saving materials. Some items can be zero rated, meaning there’s no VAT chargeable. Some examples of goods and services that fall under the zero VAT rate category include:

  • Most types of food (not served restaurants or takeaways)
  • Children’s clothing and shoes
  • Books and newspapers
  • Bicycle and motorcycle helmets

It’s important to note that some goods, services and transactions are exempt from VAT altogether, such as the services of doctors and dentists, and financial or insurance transactions. Working alongside an accountant will help you make sense of charging VAT and the applicable rates.

Flat rate VAT scheme

With the Flat Rate Scheme, you agree to pay a fixed rate of VAT to HMRC.

Essentially, you keep the difference between the amount charged to customers and the amount payable to HMRC. Your VAT turnover must be £150,000 or less to qualify for the scheme, and you must formally apply to HMRC to register for it. The VAT flat rate that you pay will vary depending on your type of business. It can range from 4% up to 14.5% depending on your business sector, and you can check how much you can expect to pay through the HMRC website.

What is a VAT return?

VAT-registered businesses in the UK must complete quarterly VAT returns, and consequently pay any money in VAT due to HMRC.

During your VAT return, you will need to summarise your sales and purchases, along with the amount of VAT relating to them. Essentially, this means calculating your total sales excluding VAT and the amount of VAT you charged on these sales to determine what needs to be paid to HMRC. This has the potential to be somewhat complicated if you provide a number of different types of goods or services which may be exempt from VAT or chargeable at various rates. This is where having the expertise of an accountant can be incredibly helpful.

Once you have determined the amount due, you can pay your VAT online (the fastest way) or by phone, or through your bank via standing order, BACS or Direct Debit. Your business will not be able to pay VAT by cheque.

Benefits of being VAT registered

For many directors of limited companies, there are certain benefits to being registered for VAT:

  • You can reclaim input tax you have paid when buying goods for your business
  • Being VAT-registered can add an element of credibility to your business, and can help you win the custom of those who will only do business with VAT registered companies

    If you are unsure about whether or not you should register for and charge VAT, speak with your accountant.

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