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VAT stands for Value Added Tax. It is a consumption tax imposed on the value added at each stage of the supply chain of goods and services. It is levied as a percentage of the final selling price and is ultimately borne by the end consumer.
In the UK, VAT is charged on most goods and services. Businesses registered for VAT must charge VAT on their sales (output tax) and can reclaim VAT paid on their purchases (input tax).
The difference between the output tax and input tax is either paid to or refunded by HM Revenue & Customs (HMRC) in the form of VAT returns.
The standard rate of VAT in the UK is 20 per cent. However, certain goods and services may qualify for reduced rates (e.g., 5 per cent for domestic fuel and power) or be exempt from VAT altogether (e.g., some types of financial services).
Businesses must register for VAT with HMRC if their taxable turnover (total sales excluding VAT) exceeds the VAT registration threshold. The threshold for 2023/24 is £85,000.
However, businesses can voluntarily register for VAT even if their turnover is below the threshold.
Voluntarily registering for VAT when turnover is below the threshold can have benefits, such as:
- Reclaiming input tax: Businesses can reclaim VAT paid on their purchases and expenses.
- Credibility: Being VAT-registered may enhance the credibility and professionalism of a business, especially when dealing with other VAT-registered entities.
- Selling to other VAT-registered businesses: When selling to other VAT-registered businesses, being VAT registered allows for charging VAT on sales, potentially reducing their overall costs.
The UK offers several VAT schemes designed to simplify VAT accounting and reporting for eligible businesses. Some common schemes include:
- Flat Rate Scheme (FRS): This scheme allows eligible businesses to pay VAT as a fixed percentage of their turnover, simplifying record-keeping and potentially reducing VAT liabilities.
- Annual Accounting Scheme: Under this scheme, businesses make advance VAT payments based on an estimated annual liability, reducing the frequency of VAT returns.
- Cash Accounting Scheme: Businesses eligible for this scheme account for VAT based on the payments received and made, rather than invoice dates, which can help with cash flow management.
- VAT Margin Scheme: This scheme applies to second-hand goods, antiques, and works of art. VAT is calculated on the difference between the purchase price and the selling price, rather than the full selling price.
VAT returns in the UK must be filed quarterly and digitally using Making Tax Digital compliant software.
Non-compliance with VAT regulations can have various consequences, including:
- Penalties and fines: HMRC can impose penalties and fines for late VAT registration, late filing of VAT returns, or inaccuracies in VAT returns.
- Interest charges: Late payment of VAT liabilities can result in interest charges being levied by HMRC.
- Increased scrutiny: Non-compliant businesses may face increased scrutiny and audits by HMRC, which can be time-consuming and may lead to further penalties if discrepancies are found.