We all know that VAT is an important part of our business, but how many of us can honestly say we know exactly what it is. When you just do something for the sake of it, you know you aren’t giving it all of the effort and attention it deserves. Below, you can find a definition of VAT, as well as some helpful pointers to guide you through applying it to your business.
What even is VAT?
VAT stands for value-added tax and refers to goods and services tax that members of the public pay to purchase something. The standard VAT rate is 20%, with reduced rate VAT being applied to car seats, booster seats, cushions and home energy. Zero rate VAT is applied to essential goods, such as basic food, children’s clothes and supplies.
Additionally, some items, such as postage stamps and financial and property transactions are exempt from VAT. As with zero rate items, these are not taxed, but unlike zero rate items, these do not have to be included in your taxable turnover.
A consumption tax
Yes, VAT is a consumption tax, meaning that it is paid at the end by the customer, rather than the company selling the product. It is also an indirect tax, as it is collected by businesses on behalf of the government.
What does it mean for my business?
First things first, you can only charge VAT if your business is registered for VAT. Typically, VAT is charged on things like business sales, hiring or leasing goods, selling business assets, commission and more.
VAT charging is required once your business is generating over £85,000 per annum, though earnings made before the limit are not subject to the tax. When you’re looking at your start-up business accounting and see that you made £90,000 in the last year, only the final £5,000 of that would be subject to VAT. if you were to earn £84,999, none of your profit would be subject to VAT.
Should I charge VAT?
If you’re a small business or just starting out, you do not have to charge VAT immediately. Doing so would almost certainly cause your prices to increase or your income to decrease. In order to remain competitive and viable, some businesses may need to lower costs to keep customers coming through the door. The threshold allows for smaller businesses to stabilise their finances and remain active in the market.
Once you have registered to charge VAT, you must continue to do so until your business starts to generate less than £85,000 a year. The VAT must be paid on all goods and services.
Hopefully, after reading this blog post you now have less of a headache whenever you think of VAT. It is very simple to work out and get your head around, once you have the basic knowledge. If you still find yourself struggling however, you can rest assured that this is something your accountant will be extremely clued up on and can help you throughout the entire process.
