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VAT for rookies

With VAT seen as one of the most confusing taxes for small businesses, Fry asks David Redfern, tax preparation specialist and director of DSR Tax Claims, to bring some clarity to the matter

VAT, or Value Added Tax, is a business tax charged on certain goods and services. VAT-registered businesses are obliged to charge VAT on their business sales of good and services, as well as when hiring or loaning goods, selling business assets and when making commission payments.

“These are known as taxable supplies and a business which is registered for VAT is required to charge the relevant rate of VAT on these taxable supplies,” says David. “However, you cannot charge VAT on your goods and services if you aren’t registered for VAT with HMRC. While most taxable supplies are to be expected, there are a few which may come as a surprise – for example, VAT is still chargeable on goods which aren’t sold for cash but are bartered or part-exchanged instead. Items which are sold to employees are also classed as a taxable supply and must be subject to VAT if your business is registered”. Businesses which are registered for VAT must charge VAT on their taxable goods and services and are obliged to send a VAT return to HMRC on a quarterly basis.

Most taxable goods and services are taxed at the standard rate, which is currently 20%. While food is generally zero-rated, all hot food cooked and served immediately, as in a takeaway or fish and chip shop, is taxed at 20%, whether it is eaten on the premises or not.

Reduced rate

Certain goods and services are, however, chargeable at a reduced rate of 5% while others are classed as zero-rated. Zero-rated goods would include cold takeaway items, such as sachets of ketchup or tartare sauce which are to be eaten away from the premises.

David explains: “Goods and services which are classed as zero-rated must still be reported on in your VAT return but you must charge a zero rate of VAT on them. While food for human consumption is usually zero-rated, certain items which are not – as well as any hot takeaway food, these include soft drinks, alcoholic drinks and ice cream. In addition, there are certain goods and services which are exempt from VAT, such as insurance or Royal Mail postage costs. These don’t need to be reported on for VAT purposes although you should still record them in your general business records.”

It’s worth bearing in mind too that goods and services provided to charities can benefit from a reduced rate of VAT.

Required to register

Businesses must register for VAT if they have a VAT-taxable turnover of £85,000 or more. A business calculates its VAT-taxable turnover as the total value of all the goods and services it sells which are not VAT exempt.

David comments: “Unlike other taxes, this is a rolling 12-month threshold, not a fixed period such as a tax year or accounting period. This means that if you believe your turnover is close to the threshold, you need to keep a close eye on it and register for VAT when it exceeds the £85,000 threshold. You can register for VAT voluntarily even if your business is below the threshold if you believe it will be advantageous to your business but you won’t be required to do so. Once registered you must charge VAT on your non-exempt goods and services”.

Once registered, a business will be required to submit a VAT return to HMRC every three months, reporting on their total sales and purchases, how much VAT the business owes and how much it can reclaim on business purchases. Businesses must submit a return even when there is no VAT to pay or reclaim. A Final VAT return will be due if you cancel your VAT registration.

DSR Tax Claims 0330 122 9972

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