Value Added Tax (VAT) VAT is a tax ultimately paid by the final consumer and businesses act as the collectors of the tax. What does VAT apply to? VAT is chargeable on the supply of certain goods and services in the UK when made by a business that is registered for VAT (see later). A registered business must charge VAT on its taxable supplies (broadly the sales made) which is known as output VAT. There are currently three rates of VAT which can be payable. These are the standard rate of 20%, the reduced rate of 5% and the zero rate. The zero rate applies where the supply is deemed to be subject to VAT but the output VAT is charged at 0%, meaning that no VAT is actually payable. A business also pays VAT on the goods and services it buys. This is known as input tax and may be reclaimed by a VAT-registered business. If the output tax exceeds the input tax, then a payment of the difference has to be made to HMRC. If input tax exceeds output tax a repayment of VAT will be made. This calculation is generally done on a quarterly basis. However, where repayments occur regularly, it is possible to opt for monthly VAT returns. Some input VAT is not reclaimable by a VAT-registered business. Two common examples are VAT incurred on entertaining UK business customers and VAT on the purchase of a car. Certain supplies of goods and services are not subject to VAT at all and are known as exempt supplies. A business
On the other hand, if the same plumber only works for other VAT-registered businesses, such as building companies, then it will not matter whether they are registered because the customer will generally be able to recover the VAT that is charged. Indeed, in general, a business that always sells to other VAT-registered businesses will normally register, even if below the annual limit, because then it can reclaim VAT on purchases and expenses. This will improve profit and can be especially relevant for new businesses because there are often high initial set up costs that carry VAT. On the other hand, registration comes at the cost of having to meet record keeping requirements, a need to submit online VAT returns and pay online and on time.
that makes only exempt supplies cannot register for VAT and will be unable to reclaim any input tax. Do I need to register? A business must register if its taxable supplies exceed an annual figure of £90,000 (from 1 April 2024). If taxable supplies are less than this a business may still register voluntarily. So, for example, if the business makes only zero-rated sales, it can still register and reclaim the input tax suffered. VAT can affect competition. A plumber, for example, who sells only to the general public will be at a disadvantage if they have to register for VAT. They may have to charge up to 20% more than a plumber who is not registered to earn the same profit.
Running a Business
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