VAT is a tax levied by the government on all sales of goods and services and stands for Value Added Tax. Any business that earns more than the set threshold, currently £82,000 per annum, must register for VAT and complete a return each quarter.
VAT forms something of a circle once you register for it. Your business must charge VAT at the stated rate of 20% (or whatever it is at the time) on any goods and services that you sell to customers and to other businesses. Your business will also pay VAT on all goods and services you buy from another business. Finally, your business must submit a quarterly VAT return to HMRC.
The idea is that with the VAT you charge on your goods or services as well as the VAT you pay, the two balance each other out quite evenly. If there is any different between the two, this is either paid to HMRC by you or paid to you from HMRC.
Businesses with an annual income of less than the currently stated threshold figure can still register for VAT but it may not be beneficial, depending on the nature of their business.
What is VAT charged on
VAT is charged on a wide range of goods and services though there are some seemingly quite odd rules about what is exempt. Generally, it is charged on things such as:
- Sales of goods and services
- Hiring goods to someone or loaning if a payment is involved
- Selling assets from the business
- Commission payments
- Staff sales such as canteen meals
- Any business goods used for personal purposes
- Bartering, part exchange, gifts, and any other type of ‘non-sales’
The standard rate of 20% is charged on these goods and services but there are two other rates used for certain things. A reduced rate is applied to things such as children’s car seats as well as domestic fuel or power payments. Mobility aids for older people are another example.
The other rate for VAT is the zero rate and this means the item is due for VAT but that the government have set the payment amount to zero. It is still recorded in VAT returns. Examples include items such as books and newspapers, children’s clothes, goods exports to non-EU countries and goods supplied to a VAT registered EU business as long as they have a valid VAT number.
Showing VAT charges and payments
In order to complete your obligations regarding VAT, you must show the VAT payment made during any transaction in your business, even if the item is a Zero rate. VAT needs to be shown on the invoice while the transaction needs to show on the business’ VAT account. It is then recorded on the VAT return.
If an item is returned, then a replacement invoice or a credit or debit note is then issued to counter the original VAT payment. This should show the reversed VAT information as well as the reason why it was issued.
Discounts and free gifts
There are different ways to deal with discounts and free gifts from a VAT perspective to ensure the payments are recorded correctly. For example:
- A discount = VAT should be charged on the discounted rate
- A free gift = VAT should be charged on the value of the gift
- Multi-buys = VAT should be charged on the combined price of the items, assuming they have the same VAT rate
- Vouchers = No VAT if they are given away free, if not then at the price charged
- Free samples = No VAT due if they are for marketing purposes and to test a product so a small quantity
Submitting a VAT return
The three months accounting period for VAT means that returns are submitted every quarter. The information that must be provided includes the total sales and purchases for the period, the amount of VAT the business owe, the amount it can reclaim (what it has paid out) and what refund you expect from HMRC. Even if there is nothing for you to pay or to claim back, a VAT return must be submitted.
You should check your VAT Return and payment deadlines in your VAT online account and make sure your finance department or accountant are fully aware of these deadline dates.
Your VAT account will tell you when your VAT Returns are due, and the date which the payment must clear HM Revenue and Customs’ account. The deadline for submitting your return online as well as paying HMRC anything owed are usually the same – 1 calendar month and 7 days after the end of an accounting period.
The only exception to the above rules is if, for example, you use the VAT Annual Accounting Scheme.
If the VAT returns is not filed by the deadline or the full payment is not made, then HMRC can make a penalty charge, usually a percentage of the outstanding amount. This percentage figure increases based around the annual turnover of the business.