VAT

VAT (Value Added Tax) can seem a complicated tax to those not in the know, but it’s crucial for every small business owner to understand it as it has implications for all business transactions. Put simply, it’s a tax that’s put on the sale of goods. It’s paid at the time of purchase by the buyer and is collected by the seller to send to the Inland Revenue. It has been providing a significant proportion of the government’s income since the early 1970s.

To make it seem even more complicated, there are different levels of VAT. The standard rate, paid at 17.5%, is for purchases deemed to be luxury or non-essential items. There’s a reduced rate of 5% for purchases regarded as important in a social or economic sense, and both a zero rate and an exempt rate for goods and services considered essential – such as medication, food, public transport, insurance or dental treatment. 

All that individual consumers need to know is that they will need to pay VAT on most goods or services they purchase. However, for businesses, who are essentially acting as tax collectors on behalf of the Inland Revenue, there are a whole lot of administrative procedures, rules and regulations involved and it’s crucial to get it right. The simplest way of looking at it is that your business must pay VAT for anything you buy (referred to as input tax) and you must charge VAT on whatever you sell (referred to as output tax). You then pay the difference to the Inland Revenue.

Anything your company purchases from another company that contributes, whether directly or indirectly, to making goods or services that will be sold on to customers, is not subject to VAT (unless you only sell exempt or zero-rated goods) as the customer will eventually pay it. You’ll be able to claim back this ‘input tax’ that you have paid from the Inland Revenue. 

If your company has a yearly turnover in excess of £61,000, you must register for VAT with the Inland Revenue and you must charge your customers VAT for your goods and services (unless they are exempt). VAT registered companies are required to provide ‘VAT returns’ to the Inland Revenue every three months to declare your VAT situation – how much VAT you have collected from customers and how much you need to claim back for your purchases. All documentation relating to VAT you have either paid or charged must be retained for at least six years as you may be requested to produce evidence of your accounting in your VAT returns or you may receive a visit from the tax inspector who will conduct a VAT audit. There are also legal requirements as to how you set up invoices for items or services that you sell, as follows:

• invoice date
• an invoice number generated by you
• company name and address
• company VAT registration number
• name and address of customer
• if appropriate, customer’s VAT registration number
• details of services or goods provided, including description and quantity
• date of supply
• price excluding VAT
• rate of VAT and VAT amount
• price including VAT

If the value of the sale is less than £250 with tax, you don’t need to provide so much detail on the invoice, simply:

• company name and address
• company VAT registration number
• supply date
• description of goods or services and quantity purchased
• VAT rate
• total amount, including VAT

You don’t need to create a VAT invoice for anything you sell that is subject to the zero rate or exempt, or for anything sold directly to members of the public, i.e. individual or domestic consumers (unless they ask you to). Bear in mind that you cannot claim back VAT for your purchases if your company does not sell any standard rate or reduced rate products or services, i.e. if all your sales are zero-rated or exempt.

If you’re in the business of importing or exporting goods, the VAT regulations become even more complex. However, in simple terms, imports or exports within the EU aren’t normally subject to VAT. For non-EU countries, VAT must be paid on imports but not normally on exports.

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