22nd February 2022
We continue our series of articles with a guide to the standard rate VAT scheme. We’ll discuss its advantages and disadvantages and whether you should consider registering.
What is VAT?
VAT is a tax charged on most goods and services provided in the UK. No matter if your business is small or large VAT is a part of the daily routine for many.
A business registered for VAT must charge VAT on all of its taxable sales (output VAT) while at the same time it is allowed to claim back VAT on its purchases (input VAT).
The business is then required to submit a VAT return to calculate the VAT that is due to HMRC. It is the difference between the VAT charged on sales invoices and the VAT suffered on business purchases.
VAT you charge on sales £2,000
Less VAT you suffer on purchases (£200)
Amount due to be paid over to HMRC is £1,800
It is important to note that not all expenses are subject to VAT and that not all VAT is recoverable. Trains, flights, entertainment, and expenses incurred abroad will not have VAT on them.
You must have a valid VAT invoice from your supplier to claim back VAT. Invoices must be in your business’s name, particularly when buying equipment for your business, such as laptops and mobile phones, or signing an agreement for commercial lettings, broadband, etc. However, there are exceptions to this, especially when buying everyday items, such as stationery or travel and subsistence.
How does VAT registration work?
An application to register for VAT should be submitted online to HMRC. Within 2 to 3 days, your business will be issued a VAT number and can begin to charge VAT from the effective date.
Should you register for VAT?
If your business turnover exceeds £85,000 in a 12-month period, you must register for VAT with HMRC. You must do this within 30 days of breaching the threshold to avoid penalties.
If your turnover is below the compulsory threshold, you can register for VAT voluntarily and take advantage of the benefits of registration.
What are the benefits of being registered for VAT?
Being registered for VAT can make your business appear larger than it is and can add more credibility to it.
Some customers or suppliers may only deal with VAT-registered businesses. So this may increase your ability to attract clients or a better supply chain.
If registered on the standard scheme, you can recover the VAT you have been charged on business purchases.
Admin will be a bit more tedious as the VAT on expenses will take centre stage in calculating your VAT liability. Your accountant will ask you to retain a VAT receipt for applicable costs and expenses and then provide this information for your accounting records. A valid VAT receipt or invoice will show an invoice number, date, business details, description of the goods or services and a VAT breakdown of the total amount charged.
Remember that HMRC requires your business records to be kept for six years!
Rates of VAT
There are three different rates of VAT that you may come across:
- A standard rate of 20% (most goods and services)
- Reduced rate of 5% (domestic fuel, children’s car seats)
- Zero rate of 0% (books, children’s clothes)
Some goods and services are said to be exempt (e.g. postage stamps), which means that VAT does not apply. However, these items are still reportable on the VAT return. Some payments have nothing to do with VAT; these are said to be out of scope (e.g. salary payments and pension contributions) and do not have to appear on your VAT return.
When do you have to pay the VAT bill?
In most cases, VAT returns are filed quarterly (from the date of registration), and businesses have a month and seven days to pay the VAT over to HMRC. Nowadays, returns are submitted digitally, in line with the Government’s Making Tax Digital initiative.
Common Business Expenses and VAT
Let’s have a look at some of the most common expenses and how they are treated for VAT.
The cost of fuel on company vehicles – where you use a company car or van for business journeys, you can claim the cost of the fuel as a business expense and, therefore, the VAT on that fuel purchase.
Subsistence – most food items are zero-rated, but some (including savoury snacks, crisps, hot food, soft drinks and mineral water) are standard-rated. Your VAT receipt should show the VAT element to reclaim.
Travel – most passenger transport is zero-rated so that you won’t be charged VAT on train, bus and air travel. Taxi fares are standard-rated, but in many cases, the business won’t be VAT registered, and therefore VAT won’t be charged. Off-street car parking is standard-rated, so in most cases (provided the business is VAT registered), you will be able to claim the VAT.
Books & magazines – these are zero-rated. Be aware, however, that digital books are standard-rated, as they are classified as electronic services.
Accountancy fees – these are standard-rated expenses.
Mobile Phone/Broadband/Landline – these are standard-rated, but the contracts have to be in the business name to reclaim the VAT.
Insurance – any insurance policy taken out by a business will be exempt from VAT.
Overseas goods – If you buy goods from overseas, these may include the VAT applicable to that country. However, this cannot be reclaimed on a UK VAT return. You can only claim UK VAT back through your returns.
Business Entertainment – Entertainment is standard-rated; unfortunately, it is not claimable.
Mileage Allowance – Where you use your own car for business journeys, you can claim the HMRC mileage allowance of 45p per mile for the first 10,000 miles per tax year and 25p per mile after that. It is possible to claim VAT on the fuel element of this mileage claim by using the Advisory Fuel Rates published by HMRC. Your accountant should be able to provide information on how to do this.
Please note that this is only intended to be a brief overview, so it may not have information specific to your business. Should you have questions on VAT, it is always worth contacting your accountant.