Value Added Tax (VAT) is a transaction tax charged on the sale of goods and services. This section explains who has to pay VAT and how to account for it.
2. Value Added Tax (VAT)
Once your turnover exceeds, or you expect it to exceed, a certain level set by the Government, you must register for VAT. It is a legal requirement.
You are required to register if your turnover exceeds the threshold during any 12 month period. You also need to register if you expect to reach the threshold within any 30 day period.
If your turnover is below the VAT limit set by the Government, you can apply voluntarily for VAT, providing your business makes taxable supplies.
HM Revenue and Customs carry out the administration, collection and enforcement of VAT. You can find details of the current VAT threshold on the HMRC website. You can also register for VAT on the same website.
Most goods and services attract VAT, although there are some, such as insurance, finance and some types of education and training, which are exempt.
There are 3 rates of VAT:
- standard rate - currently 20%, this rate applies to most business transactions
- reduced rate - currently 5%, this rate is charged on domestic fuel and power, and other items such as domestic energy saving products and children’s car seats
- zero rate - the 0% rate applies to specified businesses, including children’s clothes and footwear, books and newspapers, and some food and drink
The VAT rates can change, so always check with your accountant or local VAT office to confirm the current rate applicable to your business. (The rates quoted above are as at February 2014)
Remember, VAT has an impact on your cashflow, so be alert to payment dates.