Value Added Tax is a tax levied by governments on the sale of goods or services. The rate varies by type of good or service provided but the standard rate is 20%. This tax must be added to the price of a product or service before it is sold. VAT is administered by HM Revenue and Customs but most of the charging, collection and remittance process is completed by businesses. This is a cost incurred for which there is no compensation.
Every business with a turnover in excess of £70,000 in a rolling twelve month period must register with HMRC and complete a regular monthly, quarterly or annual VAT return. The frequency of the return will be dictated by HMRC upon registration. Once registered a business can reclaim VAT paid to suppliers against receipts from customers for goods sold. The difference is paid to, or reclaimed from, HMRC.
For most companies, the standard rate of VAT is charged and paid. Some services, such as gas or electricity, attract a lower rate and others, such as children’s clothing and newspapers, are zero rated. Therefore, knowing what rates apply and what has to be charged or can be claimed is a complex area for most businesses – and a nightmare for small businesses that cannot employ full time accountants to manage compliance.
Just because VAT is paid does not mean that it can be reclaimed as part of the regular VAT return a business completes. Integrating VAT reporting into a bookkeeping service is a simple and cost effective way to reduce costs and improve confidence that all will be correctly handled.