Business owners have plenty to consider – you may be aware of the income tax system, but did you know that you may also need to complete VAT returns?
Failing to complete VAT returns can have some serious consequences, so it’s important to understand how VAT works and how to complete a VAT return.
Read on to learn more about VAT – including the standard VAT rate and how to complete a VAT return.
What is VAT?
VAT, short for Value-Added Tax, is a form of tax on goods and services – and is often referred to as ‘sales tax’. Unlike other forms of tax such as income tax or council tax, VAT is assessed at each stage of the production process and doesn’t conform to a permanent rate.
This means that the amount of VAT you pay depends on the value of the service or the product during the production process – starting at production, through to distribution and only ending once the product or service has been sold.
VAT is paid by the consumer rather than the business, which is why it isn’t regarded as a tax on business. However, as a business, you’re still required to pay VAT to HMRC – as the customer will have already paid VAT to you when making the purchase. This makes VAT an indirect tax.
Many businesses follow a similar VAT process, but there are some exceptions – for example, charities. The main areas that are taxable for the majority of businesses include:
- Business assets sold
- Staff sales
- Hire or loan of goods
- Commission earned
- Business goods used for personal reasons
What Are VAT Rates?
Standard-rated supplies include a large proportion of goods and services – these are charged at 20%. Reduced VAT supplies (e.g domestic fuel, children’s car seats, energy-saving materials) are charged at a lower 5%.
Some supplies are zero-rated, so VAT is charged at 0%. Exports can be zero-rated, although certain rules apply. Some zero-rated VAT supplies include books, prescription drugs, most food, children’s clothing, and the construction of new homes.
Supplies that are exempt from tax include insurance, finance, and a variety of property transactions. It’s important to note that VAT does not apply to these supplies – so if your business only sells these supplies, then you can not register for VAT.
How to Become VAT Registered
Becoming VAT registered is a simple process, and can be completed quickly and easily if done online. The first step is creating an online VAT account on the gov.uk website. This is also known as a Government/ Gov Gateway account and can be used to view your current income tax information.
You’ll submit your VAT returns to HMRC through your Government Gateway account. However, certain businesses have to register for VAT through post by completing a VAT1 form.
When you register for VAT, you need to include details about your business such as your turnover, your bank details, and general business activities.
Within 30 days of registering for VAT, you’ll receive a certificate on your online VAT account. Ensure that you provide the correct registration date – as you’ll be required to pay VAT due from the effective date of registration.
What Happens if I Don’t Report VAT?
As a business owner, it is your responsibility to report VAT information to HMRC – failing to do so can result in HMRC investigations, penalties, and in extreme cases, imprisonment. In fact, the maximum penalty for VAT Fraud at the Crown Court is 7 years imprisonment as well as a fine of any amount.
Typically, it is cash-based businesses that are more likely to be investigated by HMRC – for example, taxi firms, pubs and bars, and launderettes.
How Do I Claim VAT Back?
Once you have registered for VAT, whether it be online or via the post, you should be able to claim VAT back on eligible purchases.
However, you can’t receive VAT on the cost of any non-business related expenses or VAT-exempt supplies.
If you are completing your very first VAT return, then you can claim back VAT on certain business costs that you incurred before registering for VAT.