VAT or value added tax is a form of taxation that is added to a product or service, at each point of sale. For example, when purchasing raw materials, when purchasing processed goods and finally at the point of sale to the customer, VAT is added. As the name suggests, this is a sales tax that is applied when value is added to the product or service.
Not every business needs to be registered for VAT and only those that are registered are subject to the tax. Those that pass a specific threshold of taxable turnover, are required to register for VAT. However, it’s worth noting that some companies who do not meet this threshold, may still choose to register as there are certain benefits to the process.
Taxes in general can be complicated but VAT is particularly complex, especially for those who are new to business. With this in mind- should you be VAT registered?
Businesses which have a VAT taxable turnover of £85,000 or over, over a 12 month period, must register for VAT. We talk about a VAT taxable turnover because some products are exempt- namely postage stamps and services, lottery tickets and certain financial services. It’s also worth noting that your turnover is calculated with each new month, not a specific tax year. Therefore, if you expect to meet this threshold in the coming month, you must register for VAT as soon as possible.
Once you have registered for VAT, there are specific responsibilities placed on the business. Of course, the main change is that you must now charge VAT on your products and services, at the correct rate. The current rate of VAT is 20% but there are circumstances in which this is reduced or completely exempt.
You must also keep detailed records on the goods and or services that you have purchased and the VAT that was charged. These records will become important when you complete your VAT tax return for HMRC. The majority of businesses will complete their returns quarterly, with any relevant payments made at the same time.
Put simply, your VAT tax return will inform HMRC of all the VAT that you have paid and cross reference this with the VAT you have added to goods and services. If you owe VAT, then you must pay HMRC the difference. Alternatively, if you are owed any money, HMRC will refund this to you.
Some business, who don’t meet the threshold of £85,000 turnover, may still choose to register for VAT. It may seem strange to voluntarily opt into a scheme that involves more responsibility but there are advantages to this. The main benefit to voluntarily register for VAT is that it suggests that you are a larger, well-established company that can therefore be trusted. In this instance, VAT registration is a stamp of approval that can improve prospects for smaller businesses.
The other major benefit of voluntary registration is monetary. Registered companies can reclaim the VAT that they have paid on goods and services. Furthermore, if you serve customers who are VAT registered, for example other businesses, they can also reclaim back this tax. Therefore, your prices remain competitive.
Unfortunately, mistakes can be made, deadlines missed or rules misunderstood. There may be instances in which HMRC investigate a business, whether due to irregularities or random selection. When this happens, it’s important to consult with experts who can ensure that you’re fully informed. The team at Taxation Investigation are experienced in providing expert solutions, should HMRC trigger a VAT investigation. Any businesses who are looking for help they can trust, should contact Taxation Investigation for further information.