Value Added Tax (VAT) is payable by businesses who provide goods or services and earn above the VAT threshold. The VAT threshold is currently £81,000, so if your taxable turnover has exceeded this figure over the last 12 months you will usually be required to register. It is important to note that this refers to any twelve month period, not just the calendar or financial year.
You will also be required to register for VAT if you believe your turnover may exceed the threshold in the next 30 days, or if you take over a business that is VAT-registered immediately prior to your takeover.
Who is Required to Register?
If they exceed the threshold and operate in the UK or Isle of Man, most businesses and organisations must register for VAT. This includes sole traders as well as limited companies and Limited Liability Partnerships (LLPs). Clubs, societies and associations may also be liable, along with local authorities, educational or health institutions, charities and trusts. However, some organisations may be subject to different rates.
What Goods and Services are Liable?
The definition of “goods and services” used for VAT purposes is extremely broad. It will obviously apply to physical products that are supplied to either businesses or consumers, and this includes used products. It furthermore applies to any business or consumer services such as building, consulting or cleaning.
Some sources of revenue which you may not consider a service in other contexts will also require you to register for VAT, such as entry fees to a property. However, some goods and services will benefit from a reduced rate or a “zero rate” whereby no charge is made.
What Rates of VAT are There?
The standard rate of VAT is 20%, and this applies to the majority of goods and services. However, some items or businesses will benefit from a reduced rate of only 5%. These include, among other things, domestic power or fuel, female sanitary goods, children’s car seats and conversions, renovations or alterations to residential properties.
Some goods and services benefit from a zero rate, meaning that VAT is charges at 0% and therefore no money is due. The most common examples are books and newspapers, apparel for young children and food (except food and drink served in cafés, restaurants or takeaways). You may or may not still need to register for VAT, depending on what proportion of products and services you supply are zero rated.
Should I Register Voluntarily?
Some businesses choose to register for VAT voluntarily when they don’t necessarily need to. There are two key reasons for this. Some businesses do it to project the image of a well-established, successful business and build trust rather than advertising that they earn under the threshold.
Others do it for financial reasons. VAT is usually added onto the price of products and services, collected on HMRC’s behalf, rather than taken out of the standard price tag. VAT registration also allows a business to reclaim VAT paid to other businesses. In some cases, this can lead to a net financial advantage.