VAT: the basics
What is it? - Value Added Tax, or VAT.
This is a tax that applies to most business transactions that involve
the transfer of goods or services.
Once your business turnover reaches a certain level, you will have
to register for VAT. Therefore, whenever you buy or sell anything in
the course of your business, you will have to charge VAT on your
sales, keep proper VAT records on your incoming and outgoing
transactions and pay VAT to HM Revenue & Customs (HMRC).
Even if your turnover is below the registration threshold you could
consider registering voluntarily for VAT.
How it works
A business will pay VAT on its purchases, which is called input tax,
and charge VAT on its sales, which is called output tax.
If a VAT-registered business charges more output tax on sales than
it pays in input tax on purchases, it must pay the difference to HM
Revenue & Customs (HMRC). If more input tax has been paid than
output tax charged, HMRC will refund the difference.
Compulsory VAT registration
You must register your business for VAT if you supplied taxable
goods and services with a total value of more than £77,000 in the
last 12-month period (2012-13). You must also register if you
anticipate supplying taxable goods and services valued at more
than £77,000 in the next 30-day period alone.
Certain types of goods and services are not taxable and are
therefore exempt from VAT, eg insurance, loans, or some types of
education or training.
If you find it hard keeping on top of VAT it may be worth you
looking at using an agent (accountant, employee bookkeeper or tax
adviser). They would register on your behalf, by using the VAT
Online Registration Service. You remain legally responsible for the
application.
Voluntary VAT registration
Businesses with a turnover below the registration threshold can
register voluntarily. If you are considering voluntary registration
you can get further information from the HM Revenue & Customs
(HMRC) National Advice Service Enquiry Line on Tel 0845 010 9000
Benefits

Ability to reclaim some of your input tax.

If your supplies are to other VAT-registered businesses then
they can reclaim the VAT charged.

Increased credibility for your business - some businesses
prefer dealing with suppliers that are VAT-registered.
Disadvantages

If your supplies are to the public or to non-VAT registered
businesses then they cannot reclaim the VAT charged.

Paperwork- You will need to start keeping VAT records and fill
in a regular VAT return with details of your sales and
purchases.
Different Rates of VAT
You must know how much VAT you should charge on a sale!.
There are three rates of VAT:



a standard rate, 20 per cent
a reduced rate, 5 per cent
a zero rate, 0 per cent
The crucial difference between goods and services that are zerorated and those that are exempt is that if your business supplies
only goods and services that are exempt, then you can't register
and claim the VAT back on your purchases.
If you are VAT registered and some of your purchases are used to
make exempt supplies then you are classed as partly exempt. This
means that you cannot normally reclaim all the VAT on your
purchases. If you are partly exempt, you must operate a "partial
exemption method" to calculate how much VAT you can recover.
Some larger businesses operate tailor-made special methods, which
must be approved by HMRC. If you operate a special method for
partial exemption, you must declare that "to the best of your
knowledge and belief" it is fair and reasonable.
Changes to impliment on Sales and purchases
Registering for VAT means that you must make some changes in
the day-to-day running of your business.
Sales:

VAT invoices: Starting from your date of VAT registration you
will need to issue VAT invoices.

Keep a record of the amount of VAT you charge in your
records - output tax.
Purchases:

Keep any VAT invoices for all your purchases to be able to
reclaim any VAT paid

Keep a record of the amount of VAT you have paid. Tip:
record this in a separate column in your records - input tax.
VAT returns and payments
It is common for business to account for VAT on a quarterly basis.
When you register you will be assigned a tax period and HM
Revenue & Customs (HMRC) will automatically send you a VAT
return to coincide with the end of this period.
You can also submit your return via the HMRC website and arrange
for an electronic payment.
*** All information correct for 2012-13 tax year ***