If you run a business in Droitwich or plan to start one, understanding Value Added Tax (VAT) is essential. VAT is a government-imposed tax on most goods and services, and navigating its rules can be daunting for new and growing businesses. This blog provides a guide to VAT in the UK, helping you understand what it is, when you need to register, the different VAT rates, schemes you can adopt, and how to stay compliant with VAT returns and Making Tax Digital.
VAT is a consumption tax charged at each stage of the supply chain where value is added. While it's ultimately paid by the end consumer, businesses collect and account for it on behalf of HMRC.
You must register for VAT if your taxable turnover exceeds the current VAT registration threshold of £90,000 (as of 1 April 2024) over a rolling 12-month period. However, you may want to register voluntarily if your turnover is below £90,000 - this can be beneficial if you incur a lot of VAT on purchases or want to appear more established.
Once registered, your business will charge VAT on applicable sales, reclaim VAT on eligible purchases, and submit regular VAT returns.
As part of ourguide to VAT, it's crucial to understand the three main VAT rates in the UK:
This default rate applies to most goods and services, including electronics, clothing, and professional services.
This applies to certain goods and services, including:
Zero-rated items are still taxable but at 0%, meaning you can reclaim VAT on related costs. These include:
Some goods and services, such as education and health services, are exempt from VAT. Exempt items differ from zero-rated ones, as you cannot reclaim VAT on costs related to exempt supplies.
As part of our guide to VAT, it's important to know that HMRC offers several schemes to simplify VAT accounting, especially for small businesses:
You record VAT on invoices issued and received and file returns quarterly. This is the default scheme.
This scheme is ideal for small businesses with a turnover under £150,000. You pay a fixed VAT rate to HMRC (the rate depends on your industry). However, you cannot reclaim VAT on most purchases unless it is for a capital asset over £2,000.
With this scheme, you only pay VAT to HMRC when your customer pays you rather than when you invoice them. This can help your cash flow but is only available if your VAT taxable turnover is £1.35 million or less.
You submit one VAT return annually and make advance payments throughout the year. These payments are based on the last VAT return that you filed. The Annual Accounting scheme is available for businesses with a turnover under £1.35 million.
Choosing the right scheme can help save time and money. JRMA can help you review the different VAT schemes and recommend the best for your business.
Your VAT return summarises the amount of VAT you've charged and paid. Most businesses file quarterly VAT returns, although those on the Annual Accounting Scheme do so annually.
Each VAT return must be submitted within one calendar month and seven days after the end of your VAT period. Payment is due by the same deadline.
Missing deadlines can result in surcharges and penalties, so timely filing is crucial.
To complete a VAT return, you'll need to:
Making Tax Digital (MTD) is a government initiative requiring VAT registered businesses to keep digital records and use MTD compatible software to submit VAT returns.
Since April 2022, all VAT registered businesses must comply with MTD, even if their turnover is below the registration threshold. To stay compliant, businesses must:
Failure to comply with MTD can result in penalties, so it's essential to ensure your systems and processes are up to date.
Understanding VAT can feel complex. Whether you're determining when to register, choosing the right VAT scheme, or filing your returns, this blog has provided a guide to VAT that supports your journey.
However, if you're unsure about your VAT obligations or would rather outsource this task, JRMA can help. Our VAT service has been designed to provide as much or as little support as you need. We can advise you on when to register and the VAT scheme most relevant to your business. We can also recommend which MTD for VAT software would be best for you and provide training on setting this up, recording your transactions, and filing your VAT returns. Or we can handle the whole process for you, which will free up your time, ensure everything is recorded and filed correctly, and help ensure that you do not incur any penalties from HMRC.
If you would like to find out more about VAT and your business, please get in touch. We would happily arrange a free consultation to discuss your VAT requirements. You can contact us here.
