VAT – or Value Added Tax – is added to the cost of buying the vast majority of things in the UK.
Many businesses are registered for VAT, which means their prices are quoted with the phrase ‘plus VAT’ at the end.
Not all businesses are registered, which means they do not add this to the cost of their product or service. It also means they cannot claim the cost back.
The VAT on items sold has to be paid to the government.
The VAT on items bought by a business can be claimed back providing both businesses are VAT registered and the items being bought have VAT on them.
There are also items that are exempt or outside the scope of VAT, like insurance, stamps, milk, babywear, healthcare, etc. You can find a full list on the HMRC website.
VAT in its very essence is complicated and is not always straight forward to work out.
For example, if you supply food, there is no VAT charged if the food is taken away, but the same food is subject to standard rate value added tax of 20% if it’s consumed where it is served.
You won’t always notice this. Many hot food takeaways, such as McDonald’s, will charge VAT, but absorb the cost so the consumer isn’t charged VAT separately.
When do I register for VAT?
Generally, you register for VAT when your turnover exceeds the registration threshold of £85,000 during the course of any 12-month period.
When you reach that, you are legally obliged to register, so don’t forget to do so. You can always ask your accountant or tax adviser about this.
Remember, the threshold applies to your turnover and not profit, so many firms have to register as soon as they start if they’re like to hit a turnover in excess of £85,000.
Register for VAT under the threshold
Some companies choose to register for VAT before they reach the threshold. It is a big decision and can have a lasting implication on the financial health of your business. Don’t rush it!
The main reasons for registering voluntarily include:
- Reclaiming VAT. You will have to charge VAT on your goods and services as soon as you register (this is known as output tax). It also means you can reclaim the VAT you are charged by other businesses (known as input tax). So if you buy a specialist tool for £100 and VAT is added, you’ll pay £20 VAT. But you will be able to reclaim that £20 if you’re registered.
- Building an impression. Some firms decide to register for VAT so they appear larger. As most people can quickly find out what your turnover is, they will believe your turnover is larger than £85,000 if you are registered. This can increase your standing against some competitors.
Why you need VAT invoicing
Being registered for VAT means you need to issue valid VAT invoices. If you have any kind of invoice that doesn’t include the information HMRC needs, then your customers won’t be able to reclaim VAT.
What to include on a VAT invoice
- You must include the word ‘Invoice’ on the document.
- Invoice number – this must be unique, and if you are VAT-registered, it must also be sequential.
- Date of the invoice
- Your company name/business name and registered address.
- If you a limited company you need to add your company number (shown on your certificate of incorporation from Companies House).
- Your VAT Registration Number must appear on the invoice.
- Client’s name and address.
- A concise description of the goods/services you are invoicing for (this may include price per unit, number of units and time period the invoice relates to)
- Provide the total sum owed, before VAT (i.e. net of VAT).
- Include the VAT payable (the standard rate is 20%)
- Provide the total amount which the client/customer should pay including VAT, if applicable.
- Include your company’s bank details if you accept electronic payment (account name, number and sort code).
- Further contact details – such as phone number(s), email, social media.
Making Tax Digital
If you are VAT registered you will already be completing your accounts digitally as per HMRC’s new Making Tax Digital regulations.
If you’re not then you must do so immediately. You risk being charged a penalty if you haven’t done so.
Non-VAT registered businesses will need to file their accounts digitally sometime in the future, but the Government hasn’t yet confirmed the date.
If you’re unsure about VAT or don’t know whether you should be registered speak to your accountant first. We are always happy to help so why not contact us now with your questions about VAT?