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HOW DOES VAT WORK?
We’ve all heard of V.A.T. Short for Value Added Tax, can affect all businesses whether they are VAT registered or not.
So, if you’re VAT registered you may need to add VAT to your prices. You will then send that extra money you add to HMRC in a monthly, quarterly or annual VAT Return. But you will also claim back any VAT that you’ve charged.
Let’s look at an example…
You sell socks.
You sell a pair of socks to a consumer for £12. This includes £2 of VAT.
But those socks cost you £3.60 from the supplier. This includes 60p of VAT
Sales VAT minus Purchases VAT = So simply from this transaction, you will owe the VAT man £1.40 VAT.
DO I NEED TO REGISTER FOR VAT?
So let’s talk about whether you need to be VAT registered?
The VAT Threshold is the annual turnover at which a business needs to then register for VAT.
The threshold as of 2023 is £85 thousand pounds. So if your business has a turnover AKA makes 85k in sales then you’ll need to register for VAT.
This has been fixed since 2017 and is reviewed every year.
You can also voluntarily register for VAT.
So, if you’re NOT a VAT registered business then you will still have to pay VAT on any supplies that have VAT on them. Just like we do as consumers, we pay VAT on things we buy every day, and don’t claim it back.
WHAT ARE VAT RATES?
There are currently 3 main rates of VAT;
20% - the rate for most goods and services
5% - applied to some health, energy, heating and protective products
0% - this is applied to a range of products and services to do with health, building, publishing and kids’ clothing
There are also some VAT exemptions and we call these out-of-scope sales, which applies to things like insurance, antiques, and educational training.
With regards to VAT on goods that are imported into the UK – That VAT will probably be added to the price when you pay customs, and you can generally claim it back when submitting your return.
If you sell goods and services outside the UK, specifically within the EU, you’ll probably need to add export VAT and the rate will depend on what you’re selling and who you’re selling to.
If you’re unsure if you should be charging VAT, paying VAT or need help with your returns, let us know.
If you have any other questions or we can help you with any Xero, personal tax, accounts or bookkeeping support, please get in touch. Email the team hello@thebusinesshut.co.uk or call 01858 289 189.
Thanks for stopping by,
Charlotte & The Business Hut Team
