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If you’ve ever bought anything in Britain, you’ve paid value added tax. VAT is levied on the most transactions for a good or service rendered. As the aim is for VAT to be levied on the end user, in order to avoid double taxation, VAT expenses for business-to-business transactions can often be claimed back against your tax bill. To reclaim VAT expenses, your business must be what’s called VAT-registered, which is open to any company, but is designed for those operating with a turnover over £73,000 a year. However, if you only sell exempt goods and services, you likely won’t be able to register for VAT. More on that later…

The Basics

VAT paid on the price of the goods and services you buy from another supplier is called “input tax”; tax charged to your customers you sell to is called “output tax”. If your output is greater than your input tax, you must pay HMRC the difference; if the input is greater than output tax, you will be entitled to a refund equal to this difference.

There are three levels of VAT: standard (20%), reduced (5%), and zero. Rates depend on the type of good or service, the person they are sold to and the location provided. Items covered under reduced and zero rates are generally household items like food, heating fuel, and children’s clothing, amongst others. In addition to these reduced rates, some things are exempt from VAT outright, such as the provision credit, insurance, education, healthcare, charitable donations and membership subscriptions. For a full list of applicable rates and discounts, please refer to this list on HMRC’s website.

Accounting schemes

There are a number of different ways of organising your VAT payments and refunds. The best method chosen depends on factors like frequency of payments made, amount claimed back, and type of business. Under an Annual Accounting Scheme, payments are made on a monthly or quarterly basis, and any excess payment is claimed back in one chunk at the end of the year. Advantages of this method include the convenience of only having to fill out one return per year. However, you could possibly encounter cashflow problems if you’re only receiving your refund in one lump sum once a year. Check out HMRC’s guide to the Annual Accounting Scheme.

With a Flat Rate Scheme, you simply pay a flat rate VAT on every transaction made. This ends up being equal to less than 20% of your turnover, and is designed to stop small businesses from wasting too much time calculating VAT figures. However, it can end up costing your business more than other methods if you happen to buy a lot of goods and services that would have been discounted or VAT exempt anyway. You can read more about the Flat Rate Scheme here.

A third method is the Cash Accounting Scheme, which means that you only pay VAT once your customer has paid you in full. The advantages to this are particularly significant for small businesses with cashflow problems caused by customers who are slow to pay. A company can take advantage of this system as long as their projected turnover for the next year is below £1.35 million. A disadvantage of this programme is that you can’t claim back VAT until you have paid your suppliers in full. This system is not available for lease or hire purchase, and can’t be used on invoices due in more than six months’ time. Click the link for more info on the Cash Accounting System.

If you think you need to register for VAT, you can do so via this online form. HMRC’s website also includes a list of software to use to manage your VAT payments, no matter which system you choose to utilise.

 

For VAT enquiries, you can contact HMRC.

If your business is new to VAT you can register for VAT with the VAT 1 form.

If your company is bringing in goods from the EU, you’ll need to fill in the VAT 1B form.

Use the VAT 2 form for registering a partnership for VAT.

If your company is changing ownership, you can transfer your VAT number.

You can apply for VAT group treatment, and use the VAT 51 form to register individual members of the group.

If you have any questions, please feel free to post in the comments section below.

Jaspar

Jaspar is a copywriter and one of the newest members of the Duedil team. He studied Economics and is interested in finding new ways for people to use Duedil - from entrepreneurs and investors to academics and journalists. Duedil is the world’s largest free database of company information. Using data gathered from a variety of sources, including Companies House, Duedil presents business owners, startups, venture capitalists, and the otherwise curious with key insight into any company in the UK and Ireland.