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Register for VAT

Value Added Tax (VAT) is charged upon sales throughout the European Union (EU). As of April 2000, any business that has a taxable turnover of over £52,000 per annum (pa) must register for VAT as soon as their turnover exceeds this amount or as soon the business can foresee that it will. To do this you must fill in and return Form VAT1, obtainable from: HM Customs and Excise (HMCE). You must register within 30 days of the end of the 12 month period in which the limit was exceeded, or if your taxable supplies will go over the limit in the next 30 days.

Businesses should monitor their turnover on a monthly basis, as failure to register could result in penalties. HMCE include incorporated partnerships and sole-traders in their definition of ’business’. Provided that commercial turnover exceeds £52,000 pa the business falls under the scope of VAT.

What is VAT charged on?

VAT is calculated on the value of the goods or services supplied to the customer - this is called output tax. Businesses will also have paid an element of VAT on purchases and expenses - this is called input tax. At the end of each VAT quarter, input tax is offset against output tax to calculate the exact amount of tax payable to HMCE. Businesses can only start to charge VAT once they are registered.

VAT paid on services supplied before registration may also be recovered as long as they relate to taxable supplies made within six months of registration. This is an incentive to register earlier rather than later!

What is VAT paid on?

Some services are exempt from VAT; this means that if all the goods or services supplied by your company are exempt you cannot register. This also means that you cannot claim VAT back on any of the goods or services you have bought for your business. The main items exempt from VAT are:

  • Financial services
  • Insurance
  • Certain training and education
  • Most health care
  • Postal services
  • Gaming and betting
  • Membership benefits from trade unions and professional bodies
  • Most sales, leases and lettings of land and buildings (but not lettings of garages, parking spaces or holiday accommodation)

At what rate is VAT calculated?

The standard rate for VAT is 17.5%, the special rate of 5% is charged on fuel and there is also the zero rate. The government outlines items that fall under the zero rate. Be careful not to confuse zero rated items and exempt items. You cannot claim input VAT back on exempt category items, however you can on zero rated items.

Once a business is VAT registered it should expect a visit from an inspector. This usually happens within the first three years. The inspector should not appear unannounced, so businesses have time to make sure that all their records are in order.

HMCE have detailed guidelines and procedures on the conduct of visits. If you have all your records in an orderly fashion, they aren’t to be feared!

Tips to remember

New businesses often have a period of high expenditure at start-up, and low sales. This means that input tax (on costs) may be greater than the output tax (on sales), meaning that you will get a repayment from HMCE. This helps cash flow and may make the administration of VAT worthwhile.

If you are a small business with low volumes, making sales on credit, consider using the Cash Accounting Scheme. This means you only need pay the VAT on your sales in the quarter in which you get paid (rather than in the quarter you raise the invoice).

There is a certain benefit for self-employed individuals to register for VAT since having a VAT number confers a certain ’stamp’ and infers that you have a minimum turnover, that you are keeping accurate accounts and that there is a level of compliance enforced by the VAT inspectors.

VAT registration is of course not an endorsement nor a substitute for credit checking. If you’re using freelance help or contractors, you can be confident paying them via an invoice rather than having to pay them under PAYE since they’re clearly registered as a business.

Action Checklist

  • Calculate whether your turnover is over £52,000 pa
  • Obtain a VAT1 form
  • Start calculating your input and output tax