Value Added Tax (VAT) is charged upon sales throughout the European Union (EU). Currently, any business that has a taxable turnover of over £70,000 per annum must register for VAT. Similarly, if you believe your turnover will exceed that amount in the next 30 days then you must do so.
Registering is fairly simple either obtain or download VAT1 from HMRC or its website. Or just register online. Applications should be made within 30 days of the end of the 12 month period in which the limit was exceeded, or if your taxable supplies will go over the limit in the next 30 days.
Businesses should monitor their turnover on a monthly basis, as failure to register could result in penalties. HMRC include incorporated partnerships and sole-traders in their definition of a 'business'. Provided that commercial turnover exceeds £70,000 pa the business falls under the scope of VAT.
What is VAT charged on?
VAT is calculated on the value of the goods or services supplied to the customer – this is called output tax. Businesses will also have paid an element of VAT on purchases and expenses – this is called input tax. At the end of each VAT quarter, input tax is offset against output tax to calculate the exact amount of tax payable to HMRC. Businesses can only start to charge VAT once they are registered.
VAT paid on services supplied before registration may also be recovered as long as they relate to taxable supplies made within six months of registration. This is an incentive to register earlier rather than later.
What is VAT paid on?
Some services are exempt from VAT; this means that if all the goods or services supplied by your company are exempt you cannot register. This also means that you cannot claim VAT back on any of the goods or services you have bought for your business. The main items exempt from VAT are:
Certain training and education
Most health care
Gaming and betting
Membership benefits from trade unions and professional bodies
Most sales, leases and lettings of land and buildings (but not lettings of garages, parking spaces or holiday accommodation)
At what rate is VAT calculated?
The standard rate for VAT is 20% (as of January 2011). There are also special rates for the special rate of 5% is charged on fuel and there is also the zero rate. The government outlines items that fall under the zero rate. Be careful not to confuse zero rated items and exempt items. You cannot claim input VAT back on exempt category items, however you can on zero rated items.