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Value Added Tax Registration

What is VAT, Value Added Tax?

Value Added Tax (VAT) is a tax on consumption levied in the United Kingdom by the national government. It was introduced in 1973 and is the third largest source of government revenue after income tax and National Insurance. It is administered and collected by HM Revenue and Customs, primarily through the Value Added Tax Act 1994.

You must account for VAT on the full value of what you sell, even if you:

  • Receive goods or services instead of money (eg if you take something in part-exchange)
  • Haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT
  • If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC.

If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

There are thee VAT rates

Standard rate

Most goods and services are standard rate. You should charge this rate unless the goods or services are classed as reduced or zero-rated.

Reduced rate

When to charge this rate can depend on the item being provided but also the circumstance of the sale. For example:

  • Children’s car seats and domestic fuel or power are always charged at 5%
  • Mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home.

Zero rate

Zero-rated means that the goods are still VAT-taxable, but the rate of VAT you must charge your customers is 0%. Examples of zero-rated goods include:

  • Books and newspapers
  • Children’s clothes and shoes
  • Motorcycle helmets

You still have to record zero-rated transactions in your VAT accounts and report them on your VAT Return.

Rates can change and you must apply any changes to the rates from the date they change.

Do I need to register my company for VAT?

A limited company will be required to register for VAT if its goods and services are VAT taxable (‘taxable supplies’) and the turnover for the previous 12 months has exceeded the threshold set by HMRC at that time. You should register for VAT voluntarily if you expect your annual turnover to exceed this threshold.

Voluntary VAT Registration

As of 2015 the VAT threshold is £82,000 but businesses may choose to register even if their turnover is less than that amount.

The Plus-side of VAT registration

The fact that a company has a VAT registration number can often be perceived by other potential suppliers and business partners that the company has ‘substance’ and reduces barriers to trade. VAT registration can help a company improve its cash flow through the ‘inputs and outputs’ process of VAT accounting.

Charging VAT

VAT is chargeable on your sales from the day the registration is made.

You should raise invoices for all sales made after VAT registration, and upon receipt of your certificate you can add your VAT number to the invoices, separate the sale and VAT amount and re-issue the updated invoices to your customers.

Making your VAT returns

The VAT return must be made quarterly in line with the quarterly dates shown on the VAT certificate. The returns must show specified information and the net difference between VAT on sales and purchases will either be paid to HMRC or repaid by them to your company.

Penalties will be made against the company if returns are made late and interest is charged on all late payments. Penalties are progressive – 5%, 10% and 15% and remain in force for 12months.

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