Part of running a successful business involves understanding and complying with your tax requirements as and when they arise. Whether you are starting a new venture or are an established company, it is essential to know your position in relation to VAT including how the various rules apply to you.
When should you register for VAT? Are there any cashflow benefits of voluntary registration? What VAT rate applies to your businesses sales? In what situations can you reclaim VAT? These are just some of the important questions that must be answered if you are to manage your VAT obligations and ensure you don’t pay more than is required by law or reclaim less than you are due.
What is VAT?
Value Added Tax is a government tax which is used to generate revenue to improve the economic state. It is an indirect tax on the consumption of goods and services except those that are either zero rated (food or essential drugs) or exempt (exports, money loans, property transactions.)
When do you need to register for VAT?
You can only register for VAT if you are a Business making taxable supplies.
HMRC defines a business as a continuing activity involving getting paid for providing goods or services- in money or another form of payment such as in-kind or barter. Taxable supplies include anything you do by way of your business not just those things done in the ordinary course of its day-to day running.
Some business supplies such as money loans and property transactions are not taxable and are called exempt supplies. It is important to know if you make any exempt supplies as this may affect the amount of VAT you can reclaim on things you buy for your business.
You are required to register for VAT if in the last 12 months, your turnover of taxable goods and services supplied within the UK goes above the current threshold of £81,000 or if you expect it to go above that figure in the next 30 days alone.
In some circumstances, there may be cash flow advantages to registering for VAT before you hit the registration threshold. For instance, if you aren’t VAT registered it means you are likely to be paying VAT on your business purchases but are unable claim VAT on your sales, therefore financially you are losing out.
Voluntary VAT registration may also benefit you if:
- You sell zero-rate items and buy standard rated items as you will receive a VAT refund from HMRC
- You don’t sell anything during a VAT accounting period, you may still be able to claim VAT back on your purchases.
Additionally, you may be able to reclaim VAT made before registration on goods or services purchased when you set up your business. You can also apply to backdate your VAT registration by up to four years but must be able to provide the right evidence and meet other conditions for reclaiming VAT.
Rates of VAT
There are three different rates of VAT:
Standard Rate of 20% – the majority of goods and services supplied will be standard rated.
Reduced Rate of 5% – some types of building and trade work can be reduced rate. The types of work, types of building and in some cases the types of customer are strictly defined so it is important to check the conditions in each case.
Zero rate (nil) – some types of building and trade work can be zero-rated. The types of work, types of building and in some cases the types of customer are strictly defined so it is important to check the conditions in each case.
Output Tax and Input Tax
Output Tax is what you calculate and charge on your own sales of goods and services if your business is VAT registered and applies to sales to both other businesses and consumers.
Most things you buy apply a VAT charge, however if your business is registered for VAT, you can reclaim the VAT charged on your business purchases and expenses. This VAT is called your Input Tax.
This means any expense you incur that is wholly for your business, whether that is business stationary, a company website or petrol costs to travel to business meetings can be claimed back as input tax. However if you use a service for both business and private purposes such as your mobile, you can only reclaim VAT on the amount spent for business use.
In most cases, if you are the supplier of a service, you are accountable to the tax authorities for any VAT due on their supply.
Receiving Goods or Services from Businesses in Europe
In some circumstances, rather than the supplier it is the customer who is accountable for VAT due to the tax authorities. This is known as a reverse charge and only applies where services are supplied to the UK by an overseas supplier.
Reverse charge will apply to most business to business supplies of services. If you are the customers receiving the service you are required to act as both supplier and recipient of the services. This requires you to credit your VAT account with the amount of output tax calculated on the full value of what you have been supplied and at the same time debit your VAT account with the input tax you are entitled to. If the input tax is a taxable supply, you can reclaim it and the reverse charge will have no net cost to you.
Supplying Goods and Services to Customers in Europe
For VAT purposes, the place where a service is supplied is where it is liable for VAT and determines which member states VAT is applicable. However, this won’t determine who needs to account for VAT, for that you need to understand the normal VAT accounting procedure and reverse charge procedure (see above.)
Since January 2010, if you supply business to business services the place of supply of your services is the place the customer belongs. (General B2B rule) So, if you supply goods to a business outside the UK such as Germany, the place of supply will be Germany, this means your supply is outside the scope of the UK VAT and the VAT of the member state where the customer is based will apply.
Understanding VAT and it impact on your business can be challenging. If you want to learn more about how you can minimise your liability, comply with regulations promptly and maximise your wealth, contact us today for a free consultation with one of our experienced VAT tax specialists.