The lowdown on VAT
Updated: Oct 12
What you need to know about VAT
VAT or 'Value Added Tax' is a Sales Tax. That is, it's applied to goods and services at the point of sale.
I'm a business owner - do I have to register for VAT?
If your sales (taxable supplies) will exceed £85,000 in a rolling 12 month period you must register for VAT. If you are close to this threshold you need to check at least monthly the total of your last 12 months sales and be ready to take action.
What does being registered for VAT mean in practice?
It means you must charge VAT (currently 20% at the standard rate) on your sales. You can then net the VAT you collect from your customers against any VAT paid by your business and pay the difference over to HMRC.
Once VAT registered you have to keep records of all VAT transactions, split between Output VAT (VAT you charge to your customers) and Input VAT (VAT charged to your business) and report these to HMRC on a regular basis through a VAT Return.
You also have to supply VAT invoices with your sales. A VAT invoice must include:
A unique and sequential invoice number
Your business name, address and VAT registration number
Date of supply ('tax point' date) if this is different from the invoice date
The customer name and address
A description of the goods or services supplied
Amount before VAT
VAT added (and rate of VAT charged per item)
Amount payable including VAT
A simplified format VAT invoice is allowed in some circumstances, for example for retail supplies under £250
Making Tax Digital (MTD)
From 1st April 2019, VAT registered businesses above the VAT threshold (£85,000) must submit their VAT returns electronically and keep their records digitally. There are many software solutions available to help you do this (at Jane's Accounting we love Xero). You can also opt into MTD if you are VAT registered and under the threshold. HMRC plan to extend Making Tax Digital to other taxes and pilots are underway for MTD for Income Tax. Although no timeline is announced, it's a good idea to think ahead. Keeping your business records digitally has many advantages - see more on our article on Xero.
VAT Rates and Exempt Supplies
The current standard rate for VAT is 20%, but some supplies fall into other categories:
Reduced Rate 5% - includes domestic fuel, children's car seats, and temporarily, hospitality, holiday accommodation and attractions (See below)
Zero Rate 0% - includes food (not hot takeaway food), books, clothing and most recently - women's sanitary products
Exempt Supplies - includes land, insurance, betting, education, burials, sports
[examples only - not exhaustive lists]
COVID - Temporary 5% VAT Rate for Hospitality, Holiday Accommodation and Attractions
The following supplies qualify for the temporary 5% reduced rate until 31st March 2021:
food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs;
hot takeaway food and hot takeaway non-alcoholic beverages;
sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities; and
admission to attractions that are not eligible for the cultural VAT exemption, including theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities.
Alternative Accounting Schemes
HMRC have some opt-in schemes to simplify VAT accounting. They include:
Flat rate scheme - allows a flat rate % of turnover to be paid to HMRC instead of the net of output less input tax. The rate applicable depends on the business sector.
Retail scheme - simplifies the record keeping for output VAT
Cash Accounting -VAT is accounted when cash is received or paid
Annual Accounting - means one annual VAT return and payments on account to HMRC during the year
These schemes can make administering VAT easier, but you should make sure you understand the impact on your cash flow and bottom line. Your accountant can help you work out which schemes might be open to you and the relative pros and cons.
As with other taxes, HMRC will impose penalties and surcharges if you are late in submitting your tax returns or payment for VAT due is not received on time or if you don't register for VAT when you should. They may also charge interest on any underpaid VAT.