The Basics of VAT & VAT Registration

The Basics of VAT

This is a summary of the Basics of VAT and gives an overview of what VAT is, what records to keep and how to register your business for VAT.

VAT is a complicated area where it can be best to seek professional advice.

What is VAT?

VAT (Value Added Tax) is a tax that VAT registered businesses must charge when they make supplies (that is, sell goods or services) in the UK or Isle of Man.

VAT is also charged on goods and some services which are brought into the UK.

VAT Rates

The standard rate of VAT is 20% for most goods and services.

Other VAT rates are: -

• the Reduced rate of VAT at 5%, and
• Zero rate of VAT at 0%

No VAT is charged on goods and services that are:

• Exempt from VAT, such as postage stamps, children’s clothes or
• Outside the Scope of the UK VAT system.

The VAT rate that businesses charge depends on their goods and services. You can check the VAT rate on HMRC’s website here.

When to register for VAT

You must register if:

• Your VAT taxable turnover for the last 12 months was over £90,000 (the VAT threshold)
• You expect your turnover to go over £90,000 in the next 30 days.

You must also register (regardless of VAT taxable turnover) if all the following are true:

• You are based outside of the UK
• Your business is based outside of the UK
• You supply goods or services in the UK (or expect to in the next 30 days)

You can choose to register for VAT if your turnover is less than £90,000 (‘voluntary registration’).

Further details can be found at when to register for VAT.

How to Register for VAT

You can usually register your business for VAT online. Further details are set out here.

You can start charging VAT on your sales and reclaiming VAT on items you bought from your ‘effective date of registration.’

You cannot reclaim VAT on anything that is only for personal use.

VAT Records

HMRC may check your records to make sure that you are paying the right amount of VAT.

The ‘basic rule’ is that you must create and keep normal business records, which includes annual accounts, bank statements, cash books, cheque stubs, paying-in slips, till rolls etc. What a business record is will depend on the type of business you run.

There are 2 records that are specifically required for VAT. These are:

• the VAT account – a business record of VAT you owe or can claim. If you use accounting software, the software does the calculations so long as you log transactions with VAT on them.
  
• VAT invoices for supplies to other VAT-registered businesses.
  1. Keep invoices you issue to other businesses for your services & products.
  2. Keep any VAT invoices you receive.

Digital records – you must keep some records digitally (here is a link for further details).

Generally, you must keep all your business records for VAT purposes for at 6 years.

VAT Return

The VAT return is the document you use to tell HMRC how much VAT you:

• Owe on sales (output VAT)
• Are claiming back on purchases (input VAT)

When you submit your VAT return, you should pay any tax you owe to HMRC (where Output VAT > Input VAT).

If HMRC instead owe you tax (where Input VAT is > Output VAT), your VAT return will be your claim for repayment.

You normally submit a VAT return every 3 months. To find out more, read how to fill in and submit your VAT Return.

You will need the necessary software to allow the filing of VAT returns in a way that is compatible with Making Tax Digital.

VAT Receipts

HMRC have the power to allow a VAT reclaim, at their discretion. 

However, if you want to recover VAT you have incurred, you need to get VAT receipts from your suppliers. 

If a supplier is not VAT registered, they will not be able to issue a VAT receipt.

HMRC may not allow a VAT reclaim if there is:

• No receipt at all.
• No VAT receipt (you just have the credit card receipt with no VAT breakdown)
• No proof that the business you paid was VAT registered.
• The VAT receipt is not in your business’s name.
• The address of your business is incorrect.

Retailers have a special exemption where they do not have to issue VAT invoices unless specifically requested by a customer. If the goods or services supplied are in total under £250 (including VAT), they can issue a ‘simplified invoice’ to UK customers. This has less detail than a full VAT invoice, but still contains the information you need for the VAT return.

You can see HMRC’s approach to using their discretion to allow VAT reclaims in their internal manual here.

Still have Queries about VAT?

If you need any further information on VAT registration or are approaching the VAT threshold for the first time, send us a message at hello@barefootaccouting.co.uk.