Value Added Tax (VAT) has existed in the UK since 1973 but it remains a Tax that often confuses business owners.

HMRC don’t publish a simple resume of what VAT is all about, so here are 10 key facts for you to know.

VAT is not a Tax on your Business

True. A VAT Registered business is a collector of VAT for HM Government. You add VAT to each Sale you make, at the standard rate of 20% if applicable. You receive that from your customers and you give it to HMRC, after deducting the VAT you have paid on your purchases.

Compulsory Registration

If your Annual Sales exceed £85,000 per annum, VAT Registration is compulsory. Below £85,000, you do not have to register but you can voluntarily (see below for why you might want to do this)

The Three Rates of VAT

The Standard Rate of VAT is 20%, but there is also a 5% Rate which applies to Home Fuel, and a 0% Rate which applies to Food, Children’s clothing and other selected items.

What is the point of 0% VAT?

Technically, items subject to 0% VAT are therefore subject to VAT. The Rate just happens to be 0%. Importantly as a business trader, if you are selling 0% VAT items, you will be able to recoup the VAT you have paid on your purchases. Therefore, this would justify voluntary registration for VAT if your Sales are under £85,000 (see above).

So, there is 0% VAT and there is Nil VAT?

Yes, some items are exempt from VAT. Examples are residential rents, insurance products, bank fees. Businesses providing these Services cannot register for VAT, even when their Sales exceed £85,000. Consequently, they cannot recover VAT they have paid on their purchases.

VAT Schemes

Recognising you as an unpaid tax collector, HMRC ‘offer’ a range of VAT Schemes, to make your VAT operations easier. Examples are Annual Accounting (one VAT Return per year), Flat Rate (VAT payable based purely on Sales, no need to determine VAT paid on purchases) and numerous Retail Schemes (in cases where you cannot easily determine a breakdown of your Sales between the three rates of VAT).

Penalties

A VAT Registered business might be an unpaid Tax collector, but if it fails to submit VAT Returns within a stated timeframe, or to pay the VAT liability at the right time, penalties will be applied.

VAT Errors

No one is perfect and we all make mistakes. HMRC have strict definitions of the origin of the mistakes that you might make in preparing your VAT Returns. Error penalties are based on the severity and scale of those mistakes. The highest penalties are reserved for deliberate errors.

VAT Inspections

VAT Registered businesses are subject to periodic inspections and reviews by HMRC teams, determining if you have correctly calculated your VAT liabilities and maintained and retained accurate records.

Making Tax Digital for VAT

Finally, from April 2019, all compulsory VAT Registered business have to operate their VAT digitally, which means using computer software as the basis of your VAT Return and submitting that to HMRC using approved programmes or bridging software. The former VAT portal on HMRC’s website is closed to such traders. You have no option.

I hope these Top 10 VAT Facts have been useful. Contact us for a consultation to explore VAT further.

Norman Elliott FCA

18 English Street Downpatrick BT30 6AB

18 Bachelors Walk Lisburn BT28 1XJ