All businesses which have an annual turnover of more than the current VAT threshold (£85,000) must register for VAT and complete a quarterly VAT return, once your business is registered you must do three things:
- You must charge VAT (20%) on the goods or services you sell to customers and other businesses
- You must pay VAT on the goods and services you buy from other businesses
- You must file a VAT return every quarter to HMRC.
You must register for VAT either if your turnover for the previous 12 months exceeded the threshold – currently £85,000 – or if you think that your turnover will soon go over this amount.
When adding it on to invoices you should show the VAT amount separately, listing the cost of the goods or services before VAT, the cost of VAT and what rate it was charged at, and the total amount owed.
There are three different rates of VAT that can be charged – standard rate (currently 20%), reduced rate (currently 5%) and zero rate (0%). Some goods and services are also exempt from VAT, such as antiques and education services.
There are also specific VAT rules that apply to certain trades and industries – the motor trade for example.
You can register to pay VAT online at the Government gateway website, www.gateway.gov.uk.
The VAT threshold may change once a year when the government announces the Budget for the coming year – usually in March or April – so ensure you are always charging the correct amount.
You must charge VAT on the full sale price, even if you accept goods in part exchange or barter instead of money.
Things to consider
If you are selling to other VAT-registered businesses then adding VAT to your invoice will be straightforward as they will be able to reclaim the VAT they have paid. However if you have been selling to individual customers for some time before becoming VAT-registered, then adding on effectively amounts to increasing the price they must pay by 20% as they will not be able to claim the VAT back. If you feel you are not able to do this without affecting the sales you are able to make then you may need to take the hit to your margins for some or all of the VAT amount.
If you are unclear as to how these rules affect your business, please do get in touch with us here at DNA Accountants we are always happy to talk money.