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A small business guide to VAT

If you’re not sure about the VAT threshold or when you need to register, then you’ve come to the right place. We’ve put together this brief guide to value added tax (VAT), the different rates, when they’re applicable and information on registration.

What exactly is VAT?

Value added tax is charged by businesses that are VAT registered. It’s charged on most services and goods that you can buy in the UK, as well as some that are imported from outside of the EU (European Union).

If a business is VAT registered and is then charged VAT when it buys services or goods, then it can reclaim the VAT. If it’s not VAT registered, then it generally can’t recover the VAT it’s been charged.

VAT registered businesses essentially charge VAT on top of their base sales price, collect this money and then pay it to HMRC.

When do you need to register your business for VAT?

There are two registration categories: compulsory and voluntary.

Compulsory registration

If a business makes more than the current VAT registration threshold then it must register for VAT. This means if the taxable turnover for a business for any 12-month period exceeds the threshold then they need to be registered. Currently (as from the start of the new financial year on 1 April 2017), the registration threshold is £85000. This increases every year.

There are certain other reasons why you would be obliged to register your business. For example, if you’re trading outside of the UK. If you don’t register your business on time then you could incur penalties.

It’s also worth noting that if your turnover is over the VAT registration threshold but only temporarily, you can ask for an exemption from registration.

A business can’t register for VAT if it doesn’t meet the HMRC’s definition of a business. It’s also not allowed to register if it mostly sells services and goods that are VAT exempt.

Voluntary registration

If your taxable turnover doesn’t go over the current registration threshold, then you can still voluntarily register for VAT. There are two reasons where this is a good idea:

  1. Where customers are mostly other VAT registered businesses. This means any VAT charged can be recovered, so it doesn’t affect their customers one way or the other.
  2. Where they’re often in a position of being owed a refund by HMRC, meaning the business is better off if it’s VAT registered.

Different rates of VAT explained

  • Standard: This is the default rate of tax at 20%, charged on most services and goods in the UK unless they are specifically reduced or rated zero.
  • Reduced: This is the amount (5%) charged on domestic power and fuel, the installation of energy saving materials, sanitary products etc.
  • Zero: Food, kids’ clothes and shoes, public transport, books and newspapers are subject to no tax. This doesn’t include restaurant food or takeaways though.
  • Exempt: This is where items aren’t applicable for VAT, including insurance, fundraising, membership or credit.
  • Outside the scope: This refers to items that are outside of the UK’s VAT system, including wages, rates and MOT tests among other things.

For more information on VAT and whether your business should be registered, contact Turner Little.

Turner Little and its affiliates do not provide tax, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.