Navigating the complexities of VAT can be a daunting task for any business owner. As one of the most significant areas of tax law in the UK, VAT demands a solid understanding to ensure compliance and efficient tax management. This guide will walk you through the essentials and help you tackle common VAT-related queries. If you find yourself uncertain about any aspect of VAT, remember that expert advice is just a call away. Contact Chadwicks on: 01789 773 182
What is VAT?
VAT, or Value Added Tax, is a tax on sales that VAT-registered businesses must charge their customers on the value of taxable goods or services they supply. In essence, the business acts as a tax collector, adding VAT to the sale price and then passing it on to HMRC. It’s important to recognise that VAT registration can directly impact your pricing strategy.
VAT Registration Threshold
Businesses are required to register for VAT once their taxable turnover surpasses £90,000 within a 12-month period or if they expect to exceed this threshold within the next 30 days. Registration must be completed within 30 days of the end of the month in which the threshold was crossed, and the effective date of registration will be the first day of the second month after exceeding the threshold.
Voluntary VAT Registration
Even if your turnover is below £90,000, you can still opt to register for VAT voluntarily. Although it might seem counterintuitive, voluntary registration can, in some circumstances, be tax-efficient.
Understanding Taxable Turnover
Your taxable turnover includes the total value of everything you sell that is not VAT-exempt or out of scope. This encompasses:
- Zero-rated goods
- Reduced-rated goods
- Standard-rated goods
- Goods hired or loaned to customers
- Business goods used for personal purposes
- Goods bartered, part-exchanged, or given as gifts
- Services received from businesses in other countries under the ‘reverse charge’ mechanism
- Goods and services subject to the ‘domestic reverse charge’
- Building work over £100,000 undertaken by your business for its own use
Late Registration
If you miss the deadline for VAT registration, you’ll be required to pay VAT on any sales made since the date you should have registered. Additionally, depending on the amount owed and the length of the delay, you may also face a penalty.
Temporary Exceedance of the Threshold
Should your taxable turnover temporarily exceed the VAT registration threshold, you can apply for a registration exception. To do this, contact HMRC and request a VAT1 registration form. You’ll need to provide evidence that your taxable turnover will not exceed the deregistration threshold of £88,000 in the next 12 months. HMRC will review your request and either grant the exception or proceed with your registration.
Exemption from Registration
If most of your taxable goods or services are zero-rated (0% VAT), you might be eligible for an exemption from VAT registration. You’ll need to seek permission from HMRC, and if you’re a non-established taxable person, all your taxable goods or services must be zero-rated to qualify.
VAT-Exempt Goods and Services
Certain goods and services are exempt from VAT, meaning you do not need to charge VAT on them. These include:
- Financial services, investments, and insurance
- Garages, parking spaces, and houseboat moorings
- Property, land, and buildings
- Education and training
- Healthcare and medical treatment
- Funeral plans, burial, or cremation services
- Charity events
- Antiques
- Gambling or lottery tickets
- Sports activities
A full list of VAT-exempt goods and services is available from HMRC.
Out-of-Scope Goods and Services
Some goods and services fall outside the VAT system, meaning you neither charge nor reclaim VAT on them. Examples include:
- Goods or services purchased and used outside the UK
- Statutory fees, such as the London congestion charge
- Goods sold as part of a hobby, such as stamps from a collection
- Donations to a charity, provided nothing is received in return
Understanding VAT can be complex, but mastering these key principles will set you on the right path. Should you need further assistance, contact the team at Chadwicks: [email protected]
