VAT Value Added Tax - Advice and Information

VAT is Value Added Tax on sales of products or services. At present companies are obliged to register for VAT when taxable supplies reach £67,000 in any 12 month period. However, it is important to register for VAT when you anticipate turnover reaching this amount. If you fail to register in time then any sales above this threshold will be subject to VAT. If measures are not put in place to address this situation then the VAT will have to be paid out of your profits regardless of whether you allowed for this charge in your total sale price.

It is also possible to register for VAT voluntarily if your turnover is below the threshold. This raises two fundamental points of consideration.

Firstly do you need to claim back VAT from suppliers? If registered for VAT you can claim back any VAT you pay to your suppliers. This may be of great benefit if your general purchases will be from VAT registered business that will charge you VAT.

Secondly, who are your customers? If your customers are VAT registered then they will be able to claim back any VAT that you add to the total cost of the goods or service you supply to them. However, if your customers are not registered for VAT or they are the general public then you will effectively increase your prices by up to 17.5%. If you operate in a price competitive market then this may be detrimental to your business.

It is important to weigh up the balance between who you buy goods and services from and who you will sell them on to. If however you reach the £67,000 threshold (2006/7) then you will have to register regardless of who your suppliers and customers are.

What are the current VAT rates?

There are basically three rates.
Standard rate for VAT is currently 17.5% applied to any goods or services not included in the other rates.
Reduced rate for VAT is currently 5% and applies to domestic fuel and power.
Zero rate (i.e. 0%) is applied to products such as books, newspapers, children's clothing.

So how does VAT work?

VAT you add to your invoices are classed as an OUTPUT. VAT that you pay your suppliers is classed as an INPUT. At the end of the tax period (this is usually quarterly) these need to be reconciled. If your outputs are greater than your inputs then the difference must be paid to Customs and Excise. You have one month from the end of the tax period to pay this. However, if your inputs are greater than your outputs then you will be entitled to claim that money back from Customs and Excise.

It is important to make sure that your value added tax return is submitted to Customs and Excise on time to avoid penalties.