VAT, or Value Added Tax, is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It’s a tax that businesses charge on their sales and reclaim on their purchases. The final consumer ultimately bears the cost of VAT, while businesses act as intermediaries, collecting and remitting it to the government.
VAT Threshold
The VAT threshold is determined at what stage you legally must register for VAT, and start collecting and paying VAT. You can register voluntarily before them, if you feel it is worthwhile. It is recommended to look into the pro’s and con’s of registering early.
Why VAT Matters
VAT is a significant source of revenue for governments and an essential aspect of business operations. Failure to comply with VAT regulations can result in penalties and fines, making it crucial for businesses to understand their obligations.
VAT Returns Explained
A VAT return is a report submitted to the HMRC that details the VAT a business has charged on sales and paid on purchases. It’s usually filed quarterly, although some businesses may choose to file monthly or annually, depending on their circumstances.
Components of a VAT Return
A typical VAT return includes the following components:
- Output VAT: This is the VAT your business has charged on sales to customers. It represents the tax collected on behalf of the government.
- Input VAT: This is the VAT your business has paid on purchases from suppliers. It’s the tax you’ve paid and are eligible to reclaim.
- Net VAT Payable or Reclaimable: This is calculated by subtracting input VAT from output VAT. If the result is positive, you owe money to HMRC. If negative, you’re entitled to a VAT refund.
Sales and Purchase VAT
Understanding the distinction between sales and purchase VAT is important for accurate VAT reporting.
Sales VAT
Sales VAT, or output VAT, is the tax your business charges on sales of goods and services. It’s added to the sale price and collected from customers.
Purchase VAT
Purchase VAT, or input VAT, is the tax your business pays on goods and services purchased from suppliers. It’s included in the purchase price and can be reclaimed, provided the purchases are for business purposes.
Filing a VAT Return
Filing a VAT return involves calculating the VAT liability or reclaimable and submitting the necessary documentation to HMRC, you will need specific software to file a VAT return, all VAT returns are filed using MTD software.
With the complexity of VAT returns, and the need for certain software to file a VAT return it might be worth considering an accountant who can support you with the filing of VAT returns.
