Value Added Tax or VAT happens to be a business tax that’s levied by the UK government on services and goods, which are sold or purchased for consumption or usage.
In this article, we’ll provide a brief explanation of various aspects of VAT that are important to your business.
When Should Your Business Be Registered For VAT?
UK businesses are required to obtain VAT registration in case:
Taxable turnover exceeds £85,000 during a 12-month rolling period.
This turnover amount should also include the value of:
The goods that are bought from countries within the EU
The goods or services bought from domestic or international providers
UK-based sales, which are subject to VAT
Total taxable turnover is expected to cross £85,000 in a 30-day rolling period.
In case your business doesn’t satisfy the criteria mentioned above, you are exempted from VAT registration. However, doing so voluntarily can qualify you for several benefits.
How Can VAT Affect My Business?
All businesses operating in the UK have to pay VAT on their inward supplies. Standard VAT rates hover around 20%, which is why most VAT-registered suppliers increase the invoice amount by 20%.
Registered businesses are allowed to reclaim the VAT paid on inward supplies from the HMRC. They are also allowed to charge VAT from their customers, thus passing this expense onto them. As a result, registered businesses do not need to be worried about VAT since it doesn’t add to their expenditure.
However, non-VAT registered businesses are not eligible to reclaim the VAT amount charged to them, which effectively increases their costs by around 20%.
VAT registration allows you to collect VAT from your customers. For instance, if you’re selling products or services to a customer in the UK, you can choose either of these 2 methods:
Charge a price inclusive of VAT
Increase the invoice amount by 20% VAT
In case your customers have VAT registration as well, they won’t be affected by the VAT charge since they’ll also be eligible to claim it back. However, if your customer base is composed of businesses with exempt sales or private individuals who do not possess VAT registration, they won’t be allowed to reclaim VAT, thus increasing the cost of your services or goods by 20% effectively.
What Should I Consider Before Reaching a Decision?
Once your business has been launched, you need to take the following factors into account before you commence VAT registration:
The amount of VAT you’ll have to pay and how much you can reclaim with a VAT registered business.
Your customer base and the effect VAT would have if you complete the registration and charged VAT on your services or goods.
Whether VAT registration would affect your competitiveness in the industry
Please note that VAT rates aren’t always 20%. For instance, the development of residential properties, food, and children’s clothing are all zero-rated supplies, meaning that they are subject to 0% VAT. Some goods & services are only subject to a VAT of 5%.