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Common VAT Questions and How to Answer Them

Pile of coins with sign VAT in the center

VAT is a common topic for businesses and entrepreneurs across Europe, but it’s not always easy to know where to turn when you need help or advice. If you want to learn more about how VAT works, this article will help you with 4 common VAT questions and how to answer them.

4 Commonly Asked VAT Questions

1. How does VAT work?

Defining VAT

VAT, or value-added tax, is both a consumption tax and indirect tax applied to taxable goods and services. Consumption tax refers to taxes levied on goods and services, which are ultimately paid for by those who purchase said services and commodities. Indirect taxes, on the other hand, are collected by the government through businesses. Consumers already pay for VAT whenever they buy a supply or service.

Importance of VAT

The importance of VAT, when you look at it through the lens of a country, is immense. In the UK, it accounts for a significant fraction of government revenue, alongside income tax and National Insurance Contributions (NICs). Current VAT receipts raised more than £115 billion, making this tax type a fundamental contributor to the country’s GDP. This highlights the need for VAT-registered businesses to properly charge VAT on the commodities and services they sell, report VAT amounts accurately, and submit their VAT returns on time.

Taxable Items

In the UK, there are three VAT rates. For most taxable supplies, the standard rate is 20%. There’s also the reduced rate, which businesses can apply to some taxable items, such as car seats for children, mobility aids for the elderly, and fuel. Lastly, zero-rated goods refer to supplies that are taxable at 0%. These include clothing and footwear for children, books, and most food items. There are also VAT-exempt items. No VAT is charged for items such as insurance, antiques, and health care services.

2. How do I register for VAT?

Businesses That Need to Register

Only VAT-registered businesses can charge VAT on goods and services. In the UK, businesses are required to register for VAT once they cross the VAT threshold or once they know that they are going to cross the threshold. The VAT threshold is currently at £85,000. Registering for VAT is not specific to one type of business structure. Whether you’re a sole trader or own a partnership, limited company, or limited liability partnership, registering for VAT would depend on how much your business makes in 12 months.

When to Register

Once a business owner realises that their VAT taxable turnover will cross the threshold in the next 30 days, they’ll have within that period to register for VAT. Similarly, once a business’ annual turnover exceeds the £85,000 threshold, it will have within 30 days to complete its VAT registration. Business owners should note that they can incur penalties for not registering on time. The penalties would depend on how late the registration is. Meanwhile, businesses that don’t cross the VAT threshold but still want to be VAT-registered can register voluntarily with the Her Majesty’s Revenue and Customs (HMRC).

Perks of VAT

There are several benefits to being VAT-registered. A primary advantage is you can claim VAT refunds. This essentially means that compared to businesses that aren’t VAT-registered, you get to pay 20% less on the goods and services you purchased for your business. Another benefit is that registering for VAT can make your business more trustworthy in the eyes of potential partners and clients. In turn, this can lead to more projects and sales for your business.

3. Which VAT scheme should I use?

The VAT scheme that you choose should be the most ideal for your business. There are various accounting schemes that you can choose from, including:

Standard VAT Accounting Scheme

Under this scheme, businesses must file their VAT returns to the HMRC every quarter. Businesses must also make quarterly VAT payments and VAT reclaims.

Annual Accounting Scheme

Compared to the standard scheme, the annual accounting scheme allows businesses to make their VAT payments in advance based on their last VAT return or estimated costs, if they’re newly registered. And instead of four VAT returns, businesses can submit only one return per year. A requirement to be eligible for this scheme is businesses’ annual turnover must not be more than £1.35 million.

Cash Accounting Scheme

Under other schemes, VAT must be paid by businesses once an invoice is made. With the cash accounting scheme, businesses can pay VAT once customers have made payments. Similarly, VAT refunds can be claimed once the business has paid its supplier. Like the annual accounting scheme, only businesses with an annual turnover of no more than £1.35 million are eligible to join this scheme.

Flat Rate Scheme

This lets businesses pay the HMRC at a fixed VAT rate. Depending on the nature of your business, you can pay at a flat rate ranging from 4% to 14.5%. Your taxable turnover mustn’t exceed £150,000 to qualify for this scheme.

Margin Scheme

Margin schemes are often used by businesses that deal with second-hand goods, antiques, and artworks.

Retail Scheme

VAT retail schemes aim to aid in the simplification of calculating and paying VAT. These can be categorised into three: point of sale, apportionment, and direct calculation schemes.

4. What is a VAT inspection?

VAT inspections are necessary to check whether VAT-registered businesses are compliant in submitting their returns and whether they’re making accurate payments or VAT reclaims. An inspector from the HMRC will conduct an interview to gather information about a business’ VAT compliance process. Accounting records, such as bank statements, sales and purchase invoices, journals, and supporting documents, will also be checked for any VAT errors. After the VAT inspection, HMRC will discuss their findings and disclose whether the business has any penalties it needs to pay. It will also make suggestions on how the business can improve its bookkeeping methods.

Needless to say, staying on top of VAT requirements can be challenging for any business, regardless of its size. If you need assistance and advice on applying for or in running a VAT-registered business, you can contact one of our experts today. Schedule a free consultation with us by emailing or calling 01793 852121.

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