Introduction to VAT
This article was first published on 20 May 2010 and was last updated on 14 April 2016.
VAT - short for Value Added Tax (and also known as Very Awkward Tax because it's so complicated) - is a tax surrounded by myths!
All businesses have to register for VAT? - No they don't.
All limited companies have to register for VAT? - No they don't!
OK, so what sort of a tax is VAT, and how does it work?
Essentially, VAT is a tax on sales.
If a business is registered for VAT, then it has to charge VAT on all its taxable sales. This is called output VAT.
It's also entitled to claim back most - but not all - of the VAT that it's charged by its suppliers. This is called input VAT.
BUT not all businesses have to register for VAT.
Which businesses do have to register for VAT?
HMRC set a limit for a business's annual VATable sales. If your business's VATable sales went over the limit in the last 12 months, which you must check regularly each month, or if you expect the limit will be broken in the next 30 days, you must register your business for VAT.
The limit usually changes every year and is currently £83,000.
The limit is the main factor but there are others as laid out by HMRC.
Can I register for VAT even if my VATable sales aren't up to the limit?
But if your business is making only exempt sales, you can't ever register for VAT.
What do you mean by "VATable sales" and "exempt sales"?
Most goods and services sold in the UK are VATable. There are different rates of VAT, which I'll go into in my next post.
But some are exempt from VAT, such as stamps and insurance, and also education. So if you're a home tutor, selling nothing else but your teaching, you'll never have to register for VAT because your business only ever makes exempt sales.
Why wouldn't I register for VAT straight away, even when my VATable sales are below the limit?
Who are your customers and your potential customers?
If your customers aren't registered for VAT, then they won't be able to claim back input VAT on the goods and services they buy from you. So effectively, your business registering for VAT represents a price increase to them.
If your customers are the general public (e.g. you're a jobbing gardener), or are small businesses who might well not have registered for VAT yet (e.g. you're a virtual assistant), then you'd be well advised to put off registering as long as you can. Otherwise you're stuck with either passing on the increase to your customers, or taking a profit cut.
Remember too, that registering for VAT is going to put an additional admin burden on you. Although FreeAgent will handle the calculation of the figures, you'll be legally obliged to file the returns regularly with HMRC and pay the VAT over.
Some more cynical folk say that when your business is registered for VAT, you're acting as an unpaid tax collector for HMRC.
My business has to register for VAT. How do I do that?
Either online or on paper, there are forms to fill in and send to HMRC.
Then how do I go about charging VAT to my customers, and what rate would I use?
Watch this space, we'll tell you next week!
- Video: an introduction to VAT by HMRC
- You deserve better: why you need to break up with your spreadsheet
- Simple ways to save yourself future Self Assessment stress
- Making Tax Digital consultation response published
- Not feeling (a) fine? You might have a ‘reasonable excuse’ for not completing your tax return