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All you need to know about VAT

The basics
Value Added Tax or VAT is applied to most business transactions which involves the transfer of goods and/or services.

All companies, whether limited or not, need to register for VAT once the turnover (not the profit) exceeds the threshold. Currently the threshold is £60,000 in any 12-month period. It is a legal requirement and registration takes place at the HMRC (Her majesty's Revenues and Customs). You have 30 days to register once the threshold has been met. This can be done by completing the VAT1 form and can be done online.

Once registered you will need to pay the Value Added tax on all purchases and charge it on all your sales.

The standard rate is 17.5% and different rates can apply to certain goods and services. Some are classed as zero-rated, even if you supply these you need to register if you hit the threshold and then apply for an exemption.

Even if your turnover is less than the threshold, consider voluntarily registering anyway.

How VAT Works
Once registered the business will pay Value Added tax ob it is on any purchases (input tax) and is required to charge it on sales (output tax). If the business gets in more output tax than it pays input tax, the difference must be paid to HMRC. If the opposite occurs and the business input tax is greater than the output tax a refund from HMRC is given.

Keeping VAT Records
Once registered some changes will need to be made in the day to day running of the business. Normal business records can usually be adapted easily to gain the required information. Records must be kept for a minimum of six years.

  • Once registered for VAT an invoice will need to be raised every time you make a standard-rated or reduced-rated supply to a VAT registered customer.
  • VAT invoices must show the amount and rate charged together with the VAT number allotted to you business.
  • Keep all copies of VAT invoices you send.
  • Keep a separate record of the VAT amounts you have charged (output tax).
  • A VAT invoice is needed for all purchases to enable you to reclaim any VAT paid.
  • All VAT invoices must show the rate and amount charged and the supplier's VAT number so you can reclaim the amount you pay.
  • Keep copies of al VAT invoices received.
  • Keep a separate record of the amount of VAT you have paid (input tax)
Voluntary VAT Registration
You can register even if the business turnover is below the threshold.

  • Enables you to claim some of your input tax.
  • Increases credibility for your business
  • A lot of businesses prefer to deal with suppliers with a VAT number.
  • If your customers are VAT registered, they can claim back what has been charged to them.
  • The additional paperwork involved in administration.
  • General public customers or non-VAT registered customer cannot reclaim the VAT.
When considering voluntary VAT registration speak with your accountant or call HMRC National Advice Service Enquiry Line on Tel 0845 010 9000
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