UK VAT Rates: What to Know?
VAT or Value Added Tax is a type of consumption tax charged on goods and services in the UK. It is also an 'indirect tax,' since businesses collect it on behalf of the Government. A solid accounting practice will help a business deliver correct tax returns and documentation.
At present, VAT in the UK is at 20 per cent, and most transactions include this rate. However, it does not apply for all products, and as a business owner, you must be aware of those exceptions. For instance, there is a reduced rate for sanitary products, children's car seats, and energy-saving items; these only have a five per cent VAT.
Furthermore, zero-rate VAT applies to books, newspapers, food, and children's clothes. Though these products have no charge, you must still report the sale of these types of services and goods on your tax return.
Aside from zero-rate, there are also tax-exempt items such as property or financial transactions and postage stamps. VAT-exempt products or services do not have a tax surcharge. Unlike zero-rate items, though, you do not need to count these in your turnover.
Why does the VAT rate change?
Governments raise or lower the VAT according to the priorities of the nation, or how its economy is doing. It first levied VAT in 1973, as a replacement for the Purchase Tax.
Contrary to its name, the Government charged the Purchase Tax at the time of production, not sale, and it also had a different rate for different goods. Since its establishment, the VAT rate has trended upwards, before settling at 50 per cent higher than the starting point. VAT rates change frequently, so you should keep yourself updated or hire accountancy services so you can keep accurate books.
Which organizations have to pay VAT?
You must become a VAT-registered business if you have a turnover of more than £85,000 on products and services. Aside from adding the appropriate surcharge to their items, a VAT-registered company reports to HM Revenue and Customs (HMRC) the taxes charged and paid. They must do this every three months, so hiring an accountant will make this process faster.
If you are self-employed, the process is a little more involved; first, you must keep a running total of your monthly sales over 12 months. When the total exceeds the £85,000 threshold, you must become VAT-registered. You must also factor in where you get your business; if you import goods into the UK, you could meet the threshold quicker than one year. Speak to an accountant about self-assessment to learn more.
Where can you pay for VAT?
HMRC can receive payments through phone or online banking, using a CHAS online form, or going through BACS. Direct debit, standing order, credit card payments, or building society payments are also possible. The Government provides a 'Pay your VAT bill' section on their website for guidance.
What are the ways you can charge for VAT?
A business must include the VAT at the point of sale, to make collection accurate. The invoice you use should have an invoice number and date. If applicable, separate the date of supply to the time of invoicing.
Also, you must have your business name, address, VAT registration number, your customer's name and address, and a description of the goods or services for which they paid. Each item should have the unit price minus VAT, the quantity, the VAT rate, the subtotal, and the VAT payment added on top of the cost. Cash discounts should also be printed on the invoice.
Paying your VAT bill requires meticulous record-keeping and extensive knowledge of HMRC tax procedures. If you are self-employed, it is even more important to learn how to file your taxes correctly, since the process for businesses like yours is a little different. Whether you are at the helm of a corporation or are a sole proprietor, hiring an accountant will shave time off your tax preparations and let you focus on running your company.
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