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Value added tax (VAT) is a consumption tax system applied in the United Kingdom. It is considered the third-largest revenue earning source for the national government after the income tax and the National Insurance. VAT was introduced back in 1973 and it collected by HM Revenue and Customs. This tax system applies to a majority of goods and services that are provided by businesses in the UK. It also applies to some imported goods and services.

This consumption tax is an indirect tax that is charged to the consumer but paid by registered businesses. The tax is seen as a consumption tax because it is usually charged on items bought by people, and by indirect tax, it means that it’s collected and remitted by businesses rather than the people who pay the tax.

VAT Rates

The standard rate of value added tax in UK is 20% and this rate applied to most of the purchases made by the consumer. Businesses should also be aware that there are some other VAT rates that are applied in the United Kingdom. For example, there is the reduced rate VAT that is charged on things like sanitary products, children’s car seats, energy saving measures and others. This reduced rate is charged at 5%.

There is also the zero rate, which means that a 0% rate is applied on specific goods and services. For example, zero rate VAT applies to most books, children’s clothes, newspapers, and food.  While there is no amount charged on these goods, businesses are required to record and report zero rate goods on their VAT return. In addition to that, there are items that are considered exempt. For example, financial and property transactions, and postage stamps are exempt items from the tax.

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In 1973, VAT replaced the Purchase Tax. In the Purchase Tax, tax was levied at the production and distribution levels and not at the selling level, as with the case of VAT.

Because VAT rates can change, businesses should be updated with the current applicable rates and ensure that their invoices and accounts are also updated. Business owners can use VAT calculators to get the right amount of tax that they should pay. The VAT calculations are programmed to incorporate the current VAT rates.

The 20% VAT rate was introduced on 4th January 2011 and before that the rate was at 17.5%

Who Pays VAT in UK

VAT in the UK is charged, collected, and remitted by businesses having a turnover that exceeds £85,000.  This means that if your business has a turnover exceeding this limit, it should register to charge and pay VAT amounts on products and services they sell. There is also the option where businesses can register voluntarily even when they have not passed the limit. Businesses that register to charge VAT should remit the same to HMRC during the time they file VAT returns.

There are different ways businesses can pay VAT to HMRC. For example, businesses can pay using their phones or online through the Faster Payments platform. They can also pay by CHAPS using a form that they fill online. Besides these two payment options, businesses in the UK may pay their VAT through:

·         BACs

·         Direct debit

·         Debit or credit card

·         Standing orders

·         At building society or a bank.

Registering for VAT 

When you register for VAT, you are given a VAT registration certification. The certificate will confirm the VAT number, the date you are required to remit your VAT payment and returns. It also confirms the effective date of the VAT registration for your business. Usually, the effective date of VAT registration is the date when your business reached the threshold or limit, and in case of voluntary registration, it’s the date when you asked to register.

You can register online for VAT in UK. When you register online, you create an online VAT account, which may also be referred to as Government Gateway account. You may also use an agent to submit VAT returns and handled matters pertaining to your VAT with HMRC on your behalf.

Charging VAT

Since VAT is an indirect tax, businesses collect the levy on behalf of the national government. Therefore, businesses should add the tax on the amount they charge to customers for services and goods bought. Businesses need to ensure that they add the amount correctly at the point of sale.

 When creating invoice to reflect on VAT rate and amount, businesses need to ensure the following information is available:

  • An invoice number
  • The date of the invoice including the date in which the business supplied the goods and services in the event that it’s different to invoice date.
  • Business contact information including the name and address
  • The VAT registration number
  • Contact information of the customer including the name and address.
  • Description of the products and services that are being invoiced for.

On top of that, a business should ensure that it provides information for each item featuring on the invoice including:

  • VAT rate
  • Quantity of items sold
  • Unit price in exclusion of VAT
  • VAT amount being paid
  • Total amount the customer pays excluding VAT
  • And any cash discounts.

Businesses are required to submit VAT returns to the HMRC in every 3 months. The 3 months’ period is known as the accounting period of the business. The VAT returns record things such as the total sales and purchases, amount of VAT the business owe, and the amount of VAT a business can reclaim. The VAT returns also feature the VAT refund from HMRC.

What are VAT returns? When we talk of VAT returns, we simply mean the record of the sales and purchases that your business has made and these should be submitted in every three months.

VAT Calculator

When calculating the amount you are required to pay for VAT, you may want to use a VAT calculator. The calculator is helpful if you are confused over how to calculate the VAT and it eliminates the manual method of calculating the VAT amount.

Formula for Calculate VAT in UK

amount inclusive of VAT = Amount excluding VAT + VAT amount

Amount excluding VAT*(VAT rate/100)=VAT Amount

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Posted in UK.