VAT (Value Added Tax) is a tax added to most products and services sold by VAT-registered businesses.
Businesses have to register for VAT if their VAT taxable turnover is more than £85,000. They can also choose to register if their turnover is less than £85,000.
The percentage of Value Added Tax (VAT) applied to goods and services varies depending on the type of product or service. The standard VAT rate is 20% and applies to most goods and services. However, some goods and services, such as car seats and home energy, are subject to a reduced rate of 5%. Certain goods and services, like most food and children's clothes, are zero-rated and have a VAT rate of 0%.
It's worth noting that some items, such as postage stamps, financial and property transactions, are exempt from VAT. On 4 January 2011, the standard rate of VAT was increased to 20% from 17.5%. The VAT rate charged by businesses is determined based on the nature of the goods and services they offer.
Your responsibilities as a VAT-registered business
As a VAT-registered business you must:
include VAT in the price of all goods and services at the correct rate
keep records of how much VAT you pay for things you buy for your business
account for VAT on any goods you import into the UK
report the amount of VAT you charged your customers and the amount of VAT you paid to other businesses by sending a VAT return to HM Revenue and Customs (HMRC) - usually every 3 months
pay any VAT you owe to HMRC
The VAT you pay is usually the difference between any VAT you’ve paid to other businesses, and the VAT you’ve charged your customers.
If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.
If you’ve paid more VAT than you’ve charged, HMRC will usually repay you the difference.
You can appoint an agent to deal with HMRC on your behalf if you prefer.
There are VAT schemes you can join that affect how you calculate and report the VAT you owe HMRC.
You must register if:
You must also register (regardless of VAT taxable turnover) if all of the following are true:
You can choose to register for VAT if your turnover is less than £85,000 (‘voluntary registration’).
You must pay HM Revenue and Customs (HMRC) any VAT you owe from the date they register you.
If everything you sell is exempt from VAT, you do not have to register for VAT.
If you exceeded the threshold in the last 12 months
You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.
You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.
If you register late, you must pay VAT on any sales you’ve made since the date you should have registered.
You might need to pay a penalty, depending on how much you owe and how late your registration is.
If you go over the threshold temporarily
You can apply for a registration ‘exception’ if your taxable turnover goes over the threshold temporarily.
Write to HMRC with evidence showing why you believe your VAT taxable turnover will not go over the deregistration threshold of £83,000 in the next 12 months.
HMRC will consider your exception and write to confirm if you get one. If not, they’ll register you for VAT.
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