Automated Accountancy

Value added tax (VAT)

What is VAT?

This is a system that HMRC use to collect tax revenue on behalf of the Government. It’s probably one of the more complicated tax systems in the world, but on the whole VAT is typically applied to most goods and services provided in the UK.

When you are VAT registered you will need to charge VAT on things you sell which could makes you goods and services more expensive to your customer who isn’t VAT registered. However, this will mean you can claim back VAT on things you buy, so it’s not all bad.

What are the different rates of VAT?

There are several rates we use in the UK which are:

  • 0% also known as Zero Rate
  • 5% also known as Reduced Rate
  • 20% also known as Standard Rate

There are a few other terms you may have come across, such as Exempt or Outside The Scope, which goes to show it’s already starting to look complicated.

What are the different ways to account for VAT?

Besides the different rates, there are a couple of different schemes for how you account for your VAT. These are:

  • Cash Accounting Scheme – based on when you spend and receive money
  • Standard Accounting Scheme – based on when you send and receive invoices
  • Flat Rate Scheme – based on sales value

Again, there are a few more schemes, but these tend to be the main ones.

How often do we need to account for VAT?

On top of all that, you have the option to report your VAT:

  • Monthly
  • Quarterly
  • Annually

When do I need to report VAT?

You will usually need to report your VAT 1 month and 1 week after the VAT period has ended.

For example, if your VAT period was the 3 months ended March (1st of January to 31st of March), then you would need to submit your VAT return no later than 7th of April to avoid late filing penalties.

When do I need to pay VAT?

If you are paying over VAT yourself, either by bank transfer or debit card for example, then this will need to clear and be in HMRC’s bank no later than 1 month and 1 week after the VAT return period.

If you sign up to HMRC’s Direct Debit scheme, then HMRC will take this 3 days later automatically, providing an incentive to set up a Direct Debit.

Do I need to register for VAT?

If you have sold more than £85,000 (as of the 2020/21 tax year) in the last 12 months, or you think this may breach this in the coming 12 months then you may have to register for VAT.

Some sectors of the economy are exempt from registering, like healthcare for example. The general rule however is that if you have sold, or expect to sell more than the current years threshold, you will most likely need to become VAT registered.