Value Added Tax (VAT)

VAT is a tax on consumer spending, administered entirely by firms who collect VAT from their customers and who hand it over (less the tax they pay to their suppliers) to Customs and Excise.

Most goods and services attract VAT, though a few, such as education and training, are exempt from VAT. There are currently three rates:

  Standard (17.5%)
  Reduced (5%)
  Zero rated (0%)

However, as announced in the November 2008 Pre-budget, for a period of thirteen months covering December 2008 through December 2009 inclusive, the standard VAT rate is reduced to 15%.

Once your turnover exceeds, or you expect it to exceed, a threshold of £67,000 (as of March 2008), then you must register. If your turnover is below the threshold, you may register voluntarily. In general, if most of your sales are to other businesses, then it is advantageous to register.

If you provide exempt supplies, then you are unable to recover the VAT that you pay to your suppliers; if you provide zero-rated supplies then you can recover the input tax.

Returns are normally made quarterly, but for many smaller businesses with a turnover of less than £1.35m they can be made annually using the Annual Accounting Scheme.

You can also make returns monthly, by agreement with Customs and Excise, though this is only worthwhile if you have a high turnover of zero rated goods and want to get refunds as quickly as possible.

Many small businesses are unaware that they may qualify to pay value added tax at a lower rate. This is a flat rate scheme for businesses with a turnover of £150,000 or less. You still charge VAT at the normal rates to your customers but, depending on your industry type, you only need to pay between 5 and 12% back to Customs and Excise. Obviously you can't claim any Input tax (VAT charged to you on your business purchases), but this results in considerable savings for many businesses. Check out Notice 733 on the Customs and Excise web site.

There are many accounting software packages in the UK that can help you automate the preparation of VAT returns.