VAT – what is it and who needs it

What is VAT?

Value Added Tax (VAT) is one of the most prominent words that orbits the world of business. You often hear comments mentioned such as, ‘is that plus vat?’ ‘that’s zero rated vat,’ ‘have you filed your VAT Return?’

But What is it?

VAT is a form of tax that forms an additional levy on top of the goods and services that businesses normally charge. It has been a fixture of UK commerce since 1973 when the UK joined the European Economic Community and replaced the purchase tax that existed at the time.

Under the most common “standard scheme” form, a business will charge VAT on top of their sales of goods and services. This extra charge collected on behalf of the Government is then paid over to HM Revenue and Customs (HMRC).

Unfortunately, the vast majority of businesses do not just make sales and throughout their business lives, will also incur costs that will have VAT on them. Therefore, businesses are able offset what they have collected in vat on their sales against what they have incurred on their costs.

These values are then documented onto a VAT return that is submitted to HMRC.  If the VAT collected on sales exceeds the VAT paid on purchases, the difference is payable to HMRC.  However, if the amount paid in the period on VAT exceeds what is collected a refund will be due from HMRC.

What Rate is it?

The standard rate applicable to most goods and services is currently 20%.  Over the years it has moved around from 15% in 1979 to 17.5% in 1991 through to the current rate of 20% in 2011.

However as the business environment is continually becoming more sophisticated the tax system in its attempts to keep up has become more complex also.  Thus, the 20% rate is not applicable to all goods and services.  These can change according to the product or service being offered:

  • Standard Rated – 20% Applicable to most goods and services
  • Reduced Rate – 5% For goods and services such as power and energy saving materials.
  • Zero Rate – 0% Common for goods and services such as children’s clothes and most food.

A more detailed list from HM Revenue and Customs can be found here:

Furthermore, items such as insurance and postage stamps which, due to their nature, are exempt from VAT and therefore cannot be claimed if incurred as a purchase.

Do I Need to Register for VAT?

The nature of work your business performs will determine if you are able to charge vat. If you operate in an industry where you are eligible you can voluntarily register at any level of sales revenue. However, if sales in a 12 month period exceed £85,000, then unfortunately you do not have a choice and registration is mandatory once this threshold has been breached.

If turnover falls below the de-registration threshold of £83,000 in a 12 month period you will be eligible to cancel your registration.

Should I Register for VAT?

Well, it depends, as every business is unique and what might be beneficial for one might not be the same for another, even if they operate in the same industry. The best thing to do is speak to your dedicated accountant who can review your individual situation and establish the best way forward for your business.

Where is VAT going?                                                                                          

Following the Autumn budget in November 2017 the office of Tax Simplification has recommended that the threshold for registration be reviewed as it is currently the highest in the EU and is seen as an element that distorts competition between businesses that charge and those that do not.

The Government has acted on this recommendation and commenced a consultation to look into this and whilst this is undertaken they have committed to the current registration thresholds of £85,000 and £83,000 de-registration for 2 years from the 01/04/2018.

Posted by Adrian Guy