Value Added Tax (VAT)

Value Added Tax (VAT) is charged on most goods and services that VAT-registered companies provide. As a VAT-registered company you charge VAT on the goods and services you provide, and reclaim the VAT you pay when you buy goods and services for your company

You will submit a VAT Return at regular intervals, usually quarterly. The return shows the VAT you've charged on your sales to your clients in the period, known as output tax, and the VAT you've paid on your purchases, your input tax.

If the amount of output tax is more than the input tax, you send the difference to HMRC with your return.

If the input tax is more than your output tax you claim the difference back from HMRC.

There are different VAT rates depending on the goods or services that are being provided; standard rate 20%, reduced rate 5% and zero rate 0%. The standard rate of VAT is the default rate that's charged on most goods and services unless they're specifically identified as being reduced or zero-rated.

Examples of reduced-rated items would be domestic fuel and power and sanitary hygiene products. Zero-rated items include books and children's clothes and public transport.

Registering for VAT

If the goods or services your company provides count as 'taxable supplies’ you must register for VAT if either:

  • Your turnover for the previous 12 months has gone over a specific limit; the 'VAT threshold' (currently £85,000 from April 2019).
  • You think your turnover will soon go over this limit in the next 30 days.

A company may make taxable and/or exempt sales for VAT purposes. It is only the taxable sales that are relevant in considering whether a company has a requirement to register for VAT. Some of the work performed by companies in the financial, insurance, healthcare and education sectors is exempt from VAT. If your company doesn’t operate solely in these sectors you will be providing services or goods that are considered taxable supplies. A company making only exempt sales cannot register for VAT.

You can choose to register for VAT if you wish, even if you are below the threshold.


Reasons to register if you are below the VAT threshold

‘Voluntary registration’ is the term given to becoming VAT registered even though your turnover is below the registration threshold. If your company makes all, or the overwhelming majority, of sales to VAT-registered businesses, registering VAT makes sense because you will be able to reclaim VAT on any business expenses you incur.

You should consider your customer base though. A company registered for VAT must charge VAT on its invoices at the appropriate rate, currently 20%. If you deal mainly with businesses that cannot recover VAT then it will be a real cost to your customers and impact on pricing your services/supplies.

Once your company is VAT registered you can typically reclaim VAT incurred on goods or services used in the course of your business; for example, the VAT on Brookson’s fees and on expenses can be reclaimed. As your company only pays HMRC the net of the VAT charged on its supplies, less the VAT incurred on goods or services purchased, in most cases you will be better off.


Making Tax Digital

If you are a VAT registered business with taxable turnover above the VAT registration threshold (currently £85,000 p.a.) you will have to keep your records digitally (for VAT purposes only) and submit your VAT return information to HMRC digitally through ‘MTD functional compatible software’.

MTD for VAT will apply to VAT return periods starting on or after 1 April 2019.So if your VAT quarter ends on 30th June 2019, this will be the first VAT quarter period affected by the new VAT reporting requirements.


Accounting schemes to simplify your VAT

There are special schemes that some companies can use to simplify the VAT Return process - helping to work out and minimise the financial impact of VAT on the company. Two examples are the Cash Accounting Scheme and the Flat Rate Scheme for VAT. Otherwise, you register under the Standard Rate VAT scheme.

The Cash Accounting Scheme means you only pay the VAT to HMRC when the cash is received, rather than when you raise an invoice. This can delay the VAT due and also ensures you only pay VAT on sales invoices that have been paid.

The Flat Rate Scheme for VAT determines your VAT liability based on a percentage of your business turnover. This is a scheme for small companies to simplify their administration. It allows companies to pay a lower level of VAT in return for not claiming VAT back on their expenses. If this works for you, it can represent a substantial saving. For this reason please read our section on the Flat Rate Scheme for VAT for more detailed consideration.


Submitting your VAT Return and paying your VAT

Virtually all VAT-registered companies must submit their VAT Returns online and pay any VAT due electronically. Before you can submit your returns, you must have registered and enrolled for the VAT online service. Once this is done you'll be able to submit your returns straightaway.

Once you have submitted your VAT Return to HMRC you will get an on-screen unique submission receipt reference number. It's a good idea to save or print a copy of this on-screen confirmation. A copy of every VAT Return your company submits online will be saved on your VAT online services account for a period of 15 months.

You can use an accountant such as Brookson to submit your returns online. Before they can act for you they will have to be signed up to use HMRC Online Services, enroll for the VAT for agents online service and set up authorisation to act on your behalf.

Your company will then receive a letter containing a unique Authorisation Code and asking you to confirm the request. This code should be passed immediately to your accountant. They must activate this online within 30 days.

As part of Making Tax Digital from April 2019, HMRC have advised that you must have a digital record of the following and HMRC refer to this as your “electronic account”:

  • Your business name, address, VAT number and the VAT accounting schemes used.
  • The time of your supply – this is the date that you must declare output tax on.
    This is typically when you send your VAT invoice or if you are on cash accounting, when the cash is received.
  • The value of the supply.
  • The amount of tax that you will claim.

HMRC has also confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally.

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