Guide to Management Accounting

Guide to VAT (Value Added Tax)

Value Added Tax or VAT can be a complex area for any business owner. At SCS Financial Management we have been working in the industry for a number of years and have experts who know the topic inside out. Our guide to VAT will cover everything you need to know.

For more details about the services we provide, please feel free to call us today in Reigate, Surrey on 01737 373707.

About Value Added Tax

In short, VAT is a tax that is applied to the purchase and sale of services or goods. It affects all of us as individuals as well as businesses. If you run a business, then this tax means more than just an added extra. It applies to sales, hire or loans, commission, staff sales, exchanges, business asset sales, as well as business goods that are used personally.

If a business is registered for VAT, then they will need to collect details about the amounts of tax charged to customers and the number paid out. The balance between these figures is then paid to the HMRC or reclaimed by a business.

Your Business and VAT

If a company’s taxable turnover is more than £85,000 (current figure as of December 2018), then it will need to be registered for VAT. Registration is compulsory and means that you will be able to claim back VAT which has been paid on purchases. It also means that you will need to start charging VAT when selling a service or product and ensuring that this is paid to the HMRC.

There are two separate tests which can be followed to figure out if you need to register your business. The first is historic and the other is future. The historic test requires you to look at the end of a calendar month to check if the value of all taxable sales in the previous 12 months has exceeded £85,000. If it has, then you need to register your business.

The future test can be applied at any time of the month. It looks into your up and coming sales over the next 30 days and whether you expect them to exceed the threshold. If so, then you will need to register. If you reach the threshold, then you need to let the HMRC know within 30 days of becoming aware.

There is also the opportunity to voluntarily register your company, whether you exceed £85,000 or not. If your company is approaching £85,000 turnover, then it can help to register in advance. This will avoid any penalties and could save you valuable time and money.

Current Rates and Exemptions

In the UK there are currently 3 VAT rates. These are:

• 20% (standard rate)
• 5% (reduced rate)
• 0% (zero rate)

Most goods and services are covered by the standard rate, which is set at 20%. Services or products covered by the reduced rate include energy saving material installations, domestic fuel and power, as well as child car seats. The zero rate applies to newspapers, some food and drink, books, children’s clothing, and export of goods from our country.

There are however some areas that are exempt from Value Added Tax. These include:

• Charitable Fund Raising
• Post Stamps
• Education or Training
• Insurance and Finance Services
• Letting or Selling Commercial Properties

To add to this, a business is entitled to reclaim VAT paid on some services or goods if they have been used for their operation. These include vehicles only used for business (including accessories, maintenance and fuel), utility bills (if you are a home business), staff travel, and mobile service plans covering business calls.

Areas which are not covered by VAT reclaims include anything for private use, items bought from EU countries, as well as the cost of entertainment.

Completing and Submitting Returns

As a business, it is your responsibility to maintain your records and charge VAT on goods if registered. A form will need to be completed and sent back to HMRC normally once every 3 months. This needs to be completed even if you have no VAT that needs to be reported.

Seeking help with VAT returns can help to reduce stress and make the process much easier. Our team have been working with Value Added Tax for years and can talk you through the process.

Find Out More

You can find out more about VAT and your responsibilities on the government website.