Understanding VAT Rates

When you start your business, it is essential to understand how VAT works and whether you should be VAT registered or not. Some companies decide to become VAT registered straight away, others wait until they reach the HMRC threshold. 

What is VAT?

Value Added Tax (VAT) is a tax levied by the Government which businesses have to collect via sales of their products and services. Companies with an annual turnover of £85,000 have to be VAT registered. All other companies can choose to become VAT registered if they think it will benefit their business growth. For example, some smaller businesses or self-employed consultants that have corporate clients prefer to be VAT registered as it makes them appear to be a more prominent company.

Once you are VAT registered you need to charge VAT on all sales, all invoices must clearly state the cost of the product or service, and then the amount of VAT added.

You need to keep a record of all sales and expenditures and every quarter submit a VAT return. If VAT on sales exceeds VAT paid on expenditures, you would need to make a payment to the HMRC for the difference. You may get a refund if VAT on expenditures is higher than that claimed on sales.

Different VAT rates

Three different VAT rates are currently available to businesses in the UK. It's worth talking to your accountant to help you decide which is the best rate for your business.

1. Standard rate - This is the normal VAT rate that is in use at the time. At the moment the VAT rate is 20%. This can change when the Government announces its budget, usually in the spring of each year. However, the 20% VAT rate has been in place for many years now. You would charge 20% on all sales and pay the same rate for any expenditures.

2. Reduced rate - Some items that you sell may fit into the reduced rate category. For example, if you sell any of these items, you can only add 5% VAT:

• Energy-saving items such as fuel and power
• Sanitary items
• Car seats for children
• Mobility aids for older people

3. Zero rate - Several goods are still VAT-taxable, but you cannot add any VAT when selling to your customers. You still need to record these in your tax return. For example:

• Clothes and shoes for children
• All books and magazines
• Most goods that you export to EU countries

We hope this helps you to get a better understanding of VAT. If you are considering becoming VAT registered and would like to get more information to help you make the decision, then feel free to contact us for advice.

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