VAT Guide

By now, you’ve probably heard a lot about VAT or Value Added Tax, and it is added to the cost of nearly everything you buy in the UK.

There may come a time in your business journey when you start to ask whether becoming VAT registered will benefit your business. If you’re a business, you may be required to register and collect VAT on behalf of HMRC.

These businesses can claim the VAT back on relevant purchases, which we’ll get on to later! Also, you can only charge VAT if your business is registered for VAT.

VAT is charged on things like:

business sales
hiring or loaning goods
selling business assets
commission
items sold to staff – for example, canteen meals
business goods used for personal reasons
‘non-sales like bartering, part-exchange and gifts

Type of VAT?

Standard 20%
Currently, the standard rate of 20% applies to most goods and services – including the ever-increasing world of web design services, electronics, consultancy, photography, and much, much more. This is the most common VAT rate, and if it applies to you then it’s the rate you should charge your customers for your goods and services.
Reduced Rate 5%
Mainly charged on things like fuel and power used in homes and by charities, energy-efficient materials such as insulation, property renovations, and alternations, as well as children’s car seats. If your goods or services fall into relevant categories, then this is the rate you will charge your customers.
Zero Rate 0%
The Zero rate means that your goods and services are still VAT taxable and will need to go on your VAT return. However, the VAT rate you charge to your customers is 0%. This can include items such as books and children’s clothes.
Reverse charge (services outside UK where place of supply is in the UK)
Some suppliers of services are based outside the UK. For many of these services, the suppliers don’t register for VAT in the UK and so don’t charge VAT. Instead, you as the customer must apply the reverse charge rules. Receipts or invoices received could/should have a note on them along the lines of “This supply has been made under the reverse charge scheme”. Where this is the case, please use “Reverse Charge Expenses (20%)”.

Important

Some items are totally exempt from VAT, like postage stamps, most financial services, insurance, and property transactions*.

If you only supply exempt services, you can’t usually register for VAT.

Rates are subject to change, and you must apply the changes from the date of the changes – and NOT a day later!!

*Postage stamps are only exempt when supplied by the post office; if a business recharges postage to its’ customers, this is standard rated. All exempt items should be double-checked with your accountant first. This is purely a guide, and limits will apply

Do I need to register for VAT?

Ultimately unless you are required to register as you have exceeded the £85,000 registration threshold, the decision for others could be more down to business preference as there is no real right or wrong answer.

There will come a time in your business journey when your turnover will start to reach the current threshold of £85,000.

If your turnover in a 12 month period reaches the current threshold, then registration is compulsory. This period is a rolling 12 months and can be different from the calendar year or your tax year*

*If your business is over the threshold, you must register within 30 days of going over!

How about Voluntary Registration?

Did you know that…. If you’re below the threshold you can still register via the HMRC Voluntary Registration which has a range of benefits:

Reclaim VAT on most Goods and Services you buy for your business
Boost your profile – appear bigger and more established

Planning to grow quickly?

If you believe that you will exceed the VAT threshold within the first year of trading, then you may wish to register for VAT from the very start.

The benefits of doing this are:

Your customers will get used to paying VAT on your sales, and it will remove the need to adjust your pricing when you register.
You can reclaim that VAT on all your set-up costs (that have VAT on them).
You can set up your business with all the systems in place to deal with VAT from the off.

Are most of your customers VAT registered?

We recommend reviewing your customers before deciding to voluntarily register for VAT. If you tend to work with VAT registered businesses, then they shouldn’t mind whether you are VAT registered as they’ll be able to reclaim this from HMRC when they do their own VAT Return.

This means that you can add VAT on your sales without any resistance but can then reclaim the VAT on your purchases.

However, if your customers are non-VAT registered businesses or members of the public, they will be unable to reclaim the VAT element on your invoice. This means that not having to add VAT to your sales could give you a price advantage over your VAT registered competitors.

Do you pay VAT on a lot of business expenses?

As well as reviewing your customers, it is also worth reviewing your expenses.

You may find that your main expenses are wages, non-VAT registered freelancers, software, and so on that doesn’t have VAT on them. If that is the case, you may find that if you register for VAT, all you’ll be doing is completing VAT Returns so you can pay over the VAT collected on your sales over to HMRC.

The flip side to this, if you have a large number of purchases that you are paying VAT on, such as your stock, rent, or equipment, reclaiming this each quarter could reduce your costs and help with cash flow.

Can I reclaim VAT on costs already incurred?

If you do decide that you will register for VAT, either voluntarily or because you have exceeded the VAT threshold, HMRC does allow you to reclaim VAT on:

4 years’ worth of goods if you still have them within the business
6 months of services

If you do decide to claim back VAT on historical purchases, this could result in amendments needed to be made to previously submitted accounts. Speak to your FC accountant if you are considering this.

This could be a great way to aid with cash flow, as if in the last few months you have purchased a large item of equipment, and then you could now look to reclaim the VAT.

Flat Rate Scheme

Do you fancy simplifying your VAT return?

If your estimated taxable turnover is less than £150,000, you can qualify for the Flat Rate Scheme (FRS). Once you are using the scheme, you can continue to do so until your total business income exceeds £230,000.

The FRS is a little different than normal, so here’s the breakdown

You’ll pay a fixed rate of VAT to HMRC
You can keep the difference between what you charge to customers and pay to HMRC.
HMRC allows newly registered companies to apply for a 1% discount to their rate for the first year!

The only slight downside is that you are unable to reclaim VAT on your purchases unless it’s for certain capital assets over £2,000

Place of Supply

If you supply services abroad you will need to work out the ‘place of supply.’ The place of supply is the location you make a supply and where you may be charged and pay VAT. However please note overseas rules are complex depending on goods or services and where you are supplying to and from.

There are various rules that apply with services, depending on:

whether you’ve more than one business location
the kind of service you provide
the place where your business or your business customer ‘belongs’

If you belong in the UK and the place of supply of your services is deemed to be the UK, you must charge any UK VAT due and account for it to HMRC regardless of where your customer belongs.

If the place of supply of your services is outside the UK, you or your customer may be liable to account for any VAT due to the tax authorities of that country.

Where the place of supply of your services is outside the UK, you should make sure that your records contain enough evidence that this is the case.

If the place of supply of your services is deemed outside the UK you shouldn’t charge UK VAT but you may need to account for the local tax on where the service is being provided, you’ll need to consider the tax rules of the country into which you are making your supply and whether you need to register there.

If you believe the above may impact your business you should seek out a VAT specialist who deals with overseas business as this area can get very complex depending on the type of service or goods you are working with who will be able to advise accordingly.

If you would like to know more about this area or even help to register for VAT then do get in touch