[vc_row][vc_column width=”1/1″][vc_column_text]Many people who have just moved to contracting will see an increase in wages that means they will have to deal with VAT for the first time. This article will provide a brief overview of the basics of VAT: What Is VAT? VAT – or Value Added Tax – is a tax that is levied on the sale or provision of various kinds of good and services. It is considered to be a tax on the addition of value to those services and products, or to put it more simply on the difference in price between the money you have paid for a product or service and the money you charge for that product or service. A business that is registered for VAT will therefore have to be charged VAT on its sales but will also be able to claim back any VAT charged on the purchases that it has made from other businesses registered for VAT. In summary:

  • Your business will pay VAT on any services or items you purchase from other businesses.
  • Your business will charge VAT on any services or items that it sells to other businesses or customers.
  • Theoretically this should mean that whatever VAT your business has to pay should be balanced out by the VAT your business charges. If it doesn’t then you can level it out with HMRC via a VAT return.

For more information see the HMRC introduction to VAT Who Needs to Register for VAT? Not every business has to register itself for VAT. Businesses must register for VAT if:

  • Their turnover throughout the previous 12 months was in excess of £70,000 (which was the threshold as of 2010)
  • Or their turnover is getting close to that £70,000 threshold in the current year.
  • If a business has a turnover of less than £67000 it can still be advantageous to register for VAT if (a) they purchase more VAT charged items than they sell or (b) they want to appear more professional and highlight to their customers and to other businesses that they are a legitimate and HMRC certified business.

How Much Is VAT? VAT is generally charged at 20% but there are exceptions. There are three different rates:

  • The standard rate of 20%
  • The Reduced Rate of 5%
  • The Zero Rate of 0%.

Generally most items are set at a standard rate unless they are specifically declared not to be. The reduced rate will normally apply to various things like children’s car seats, certain hygiene products, various energy saving installations and domestic power and fuel sources. Zero rate products include food, newspapers and books, public transport and children’s clothing. Additionally certain products and services are VAT exempt including medical services from doctors or dentists, charitable fund-raising events, providing of credit, education, insurance and membership subscriptions. How You Calculate Your VAT. VAT has to be charged on every sale or service you offer to your customers or to other businesses and then has to be added to the price:

  • This is done by multiplying VAT rate percentage against the cost and then adding that onto the cost of the service or item.
  • On your receipts you need to show the VAT separately, by showing the cost of the product or service and then the cost of the VAT (and what rate it was charged at) and then the combined total at the bottom.

Paying VAT TO HMRC Finally, you need to be aware of how HMRC likes you to handle all VAT:

  • Keep a record of all your VAT transactions, including the VAT that you have paid on purchases and the VAT that you have charged.
  • The VAT you have charged your customers or other businesses is referred to as ‘Output Tax.’
  • The VAT that you have had to pay to other businesses when you bought their services or goods is referred to as ‘Input Tax.’
  • A VAT return that lists your net input tax and net output tax needs to be filled out every three months.
  • The difference is then calculated between your Input Tax and Output Tax. You will have to pay HMRC any difference between your Output Tax and your Input Tax (the difference between VAT charged to your customers less your total bill for VAT that you have had to pay other businesses).
  • However, if you have paid out more VAT than you have got back in sales (ie your Input Tax is larger than your Output Tax) then HMRC will have to give you some money back.
  • The payment for your VAT will be due on the same date as as your VAT return is due, although you can pay seven days later if you pay online. Click here http://www.hmrc.gov.uk/vat/vat-online/ for online VAT returns.


Fantastic VAT Video from Inca Chartered Accountants