AD. VAT is an indirect tax charged on the selling price of goods and services by a VAT-registered business. This tax is paid to HMRC at every level of the production process. However, not all businesses can charge VAT to their customers unless they are VAT-registered. In This guide Experlu shares the details of what VAT means to businesses and when they should register for it at HMRC.
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Table of content
- What VAT means to business
- When to register for VAT in the UK
- How do I become VAT registered?
- Final thoughts!
What VAT means to business
When a business is registered for VAT, it must charge a standard VAT rate of 20% on the sale of its goods and services. You are responsible for collecting this tax from the consumers and paying HMRC.
If you are a part of the production chain, you must also pay VAT to your supplier. But you can reimburse that VAT when your end consumers pay their invoices.
For example, you buy raw materials for making furniture from a supplier at £20 plus 20% VAT. You paid the supplier £24, and the supplier pays £4 to HMRC as VAT. When you sell the ready furniture to a consumer, you can charge them £40 plus 20% VAT, which is £40 + (£40×20%) = £48. You pay HMRC £4 and keep the remaining £4 as reimbursement of the previously paid VAT to your supplier.
If you pay more VAT than the VAT you collected from your customers, HMRC usually pays off the difference. Similarly, if you pay less VAT than the amount you collected from your customers, you must pay the difference to HMRC.
In case you are late paying VAT to HMRC, you will be charged with late payment interest. This interest will be calculated from the first day of your payment till the entire VAT amount is paid. If you are 15 days late, you will also be charged a late payment penalty. You can use a VAT checker to determine the VAT you owe to HMRC and pay the right amount within the deadline.
When to register for VAT in the UK
You must register for VAT when your business's annual turnover exceeds £90,000 for 12 consecutive months. Even if you are expecting to cross that amount in the next 30 days, you can register for VAT. Otherwise, there are a few more cases where VAT registration is needed, like
- You are based outside the UK
- Your business is based out of the UK
- You supply or expect to supply some goods and services to the UK
If your annual turnover is less than £90,000, you can also get your business VAT-registered voluntarily.
While taking over a VAT-registered business, you must use a VAT calculator to check if the new and the existing business is making a turnover above the VAT threshold. If yes, you must register for VAT. Otherwise, you can voluntarily register your business for VAT.
However, if you are late to register for VAT, you must pay the tax on any sales you made since the date you should have registered. Even HMRC can charge you a penalty depending on how much VAT you owe and how late your registration is.
How do I become VAT registered?
You can get VAT registration online but it requires your Government Gateway user ID and password. There are a few steps that you need to go through and provide a few necessary documents for successful registration.
To register a limited company, you need the following documents
- Company registration number
- Business's bank account details
- Your UTR (Unique Taxpayer Reference)
- Annual turnover details
- Your self-assessment
- Corporation tax details
- PAYE details
To register as an individual or as a partnership, you will require the following documents
- National Insurance number
- Any identity document like a passport, driving license
- Your bank account details
- Your UTR (Unique Taxpayer Reference)
- Annual turnover derails
- Your self-assessment tax return
- Payslips
- P60 form
After successful VAT registration, you will receive a unique 9-digit VAT number that must be included in all your invoices. You must also charge your clients with a standard VAT rate of 20% and pay the right amount to the government.
Final thoughts!
Understanding VAT liabilities can be difficult for new businesses. You can hire an accountant who can advise you when you register for VAT and start collecting the amount from consumers. They can also help you in staying compliant with the VAT regulations in the country.
