5 – VAT – a kind of sales tax

Last Updated on 8 July 2020

Value Added Tax is a tax on the sale of goods and services. It kicks in when the seller is VAT registered, depending on the item being sold. This applies to sole traders too.

A VAT-registered business is effectively a tax collector working for HMRC.

The standard rate is 20%. (Some items attract a lower rate of VAT. Some are exempt.)

On 8 July the Chancellor Rishi Sunak announced that businesses in hospitality and tourism will charge 5% to customers between 15 July 2020 to 12 January 2021.

You have to register for VAT if your turnover (as opposed to profit) is more than £85,000 in any twelve month period. (This figure usually changes every financial year in April, although it’s currently fixed until April 2022.)

The government might review whether to bring this threshold down to something like £25,000 turnover per year, forcing more small businesses to be VAT registered.

You can usually register voluntarily if your turnover is lower than the compulsory threshold.

Registration is simple and free. Voluntary registration is normally approved when you get your first income, even if you apply earlier.

Advantages:

  • Kudos and credibility – you look like a proper business
  • You can claim some VAT on capital items (kit and hardware) bought up to four years BEFORE you registered (and up to six months for services you’ve bought).
  • VAT can be re-claimed on business expenses and equipment once registered, including motor expenses (at various rates)
  • There is a simplified VAT system which might work for some small businesses
    (See help sheet 6: Flat Rate Scheme for Small Businesses)

Disadvantages

  • You’ll be more expensive to people who are not registered for VAT (as they won’t be able to claim your VAT element back from the VAT people). Not a problem if you’re supplying to VAT-registered businesses.
  • Penalties for late payment
  • Some additional book-keeping – though nothing terrifying if you’re organised,and if you issue small numbers of invoices and have low expenses
  • VAT returns are due every 3 months. Do it online or using special software (see help sheet 4).
  • Annual accounting also possible (though quarterly is a good discipline)

VAT returns are due every 3 months. Do it online or using special software (see handout 4).

Annual accounting also possible – though quarterly is a good discipline as it makes you check your figures every three months.

Because of coronavirus VAT registered businesses are allowed to defer any payment normally made before 30 June 2020. They now have to pay it by 31 March 2021.

Special rules apply when supplying to businesses and customers elsewhere in the EU.

Selling apps, downloads or other e-services to customers in Europe? You must take account of VAT rules from 1 Jan 2015, even if you are not VAT registered in the UK.

Things might change substantially because of Brexit and the end of the transition period on 31 December 2020. 

Find out more:
www.gov.uk/business-tax/vat
HMRC National Advice Service: 0300 200 3700
gov.uk – VAT and selling outside the UK
gov.uk – Guide to VAT and digital services in EU

Posted on 27 January 2020