What is VAT
VAT is short for Value Added Tax, it is a business tax that the government collect and it it based on sales of goods and services. Not all businesses are required to register for VAT, but it is important that you know if you are required to administer VAT as it is a legal requirement and failure to do so can result in fines.
Businesses with an annual turnover of more than the current VAT threshold (£85,000 in the 2019/2020 tax year) will have to register for VAT. Once you become VAT-registered, you have to:
Charge 20% VAT rate on all goods and services you sell
Pay VAT on goods and services purchased from other services
Complete a VAT return (monthly, quarterly or annually)
Business that do not meet the mandatory limit may register voluntary. This can be an advantage to some businesses as it can improve the cash flow by claiming back VAT on costs. However, voluntary registration is not always the best option for example if your customers are not VAT registered.
Some businesses are exempt from VAT, for example insurance and finance if you only sell goods or services that are exempt from VAT then no VAT is added to the sales price. Exempt items are different from zero-rated items – neither has VAT added to the selling price, but zero-rated goods and services are taxable from VAT at 0%.
Certain businesses can be partially exempt from VAT as well, which typically means they incurred VAT on purchases related to exempt supplies.
There are several different VAT schemes to choose from:
Standard Rate Scheme
Annual Accounting Scheme
it is important to choose the correct scheme that benefits you and your business.