VAT stands for value added tax and it is a tax on the sale of most goods and services. Individuals cannot register for VAT – only businesses. Not all businesses are required to register for VAT i.e. if the businesses’ annual VATable sales are below £85, 000. VAT registered businesses must charge their customers VAT on all applicable sales. We mention applicable sales because not all products/services are VATable i.e. some are exempt and others carry different rates. For more information on this please visit VAT tax rates. The standard VAT tax rate on most goods and services is 20% changing from 17.5% in 2011. Businesses pay HMRC the difference between the VAT that customers/clients pay and the VAT on purchases (the VAT paid to suppliers). As a result, if the VAT paid by customers is less than VAT on purchases (i.e. negative balance) HMRC refunds the difference.
Therefore, the decision to register for VAT (if sales are below threshold) must be analysed and evaluated. For example, if your customers are small businesses, or members of the general public that are not themselves registered for VAT, then if you register, they may see that as a price increase because they won’t be registered for VAT and so can’t reclaim the VAT you charge them. VAT returns need to be submitted to HMRC in order to determine the tax obligation/refund. As a result, VAT accounting is extremely essential for VAT registered businesses. It is also important to understand that there are different types of VAT schemes (see links below) so it is essential to choose the one that is the most suitable for your business.