VAT stands for Value Added Tax. It describes the percentage of money deducted from most goods or services bought from VAT registered businesses within the EU.
The origins of VAT
Value Added Tax was first imposed on large businesses in France by modern economist Maurice Lauré in 1954. It didn't come into force in the UK until nearly two decades later in 1973, as part of the deal to join the European Economic Community. Anthony Barber, Chancellor of the Exchequer at the time, described it as 'a simple tax'.
VAT in the UK today is a far cry from the 'simple' 10% tax levied from goods purchases in the 70's. Over the years VAT has been seen by many as a saviour in terms of raising revenue for the government. It is for this reason that the UK government increased the standard rate of VAT by 2.5% in January 2011, from 17.5% to 20%.
Who does VAT effect?
- VAT-registered businesses.
VAT for customers
As EU residents, we are all required to pay VAT on certain products we buy. The UK government has always promised to exclude VAT from particularly beneficial items, such as books. This means that some products and services in the UK are exempt from VAT, and some are reduced.
VAT is currently levied at three different rates in the UK. These are:
- standard rate of 20%
- reduced rate of 5%
- zero rate of 0%.
The standard rate of VAT is known as the default rate and is the rate charged on most goods and services across the UK unless specifically identified as reduced or exempt. Goods and services liable to VAT are referred to as 'taxable supplies'.
Examples of reduced-rate goods include:
- Fuel and power purchased for domestic use.
- Installation of energy-saving measures such as insulation, double glazing etc.
- Sanitary hygiene products.
- Car seats for children.
Examples of zero-rated goods include:
- Food, unless purchased in a restaurant or take-away shop.
- Newspapers and books.
- Clothes and shoes for children.
- Public transport.
This is not a full list of zero-rated items and there are many more products and services that do not charge VAT.
VAT for businesses
For small businesses, VAT can be a complicated issue. Hundreds of additional and altered measures have been bought in since VAT was first introduced to the UK in 1974. Every year, thousands of businesses make mistakes and miss VAT deadlines, resulting in extensive fines and surcharges.
If your business meets the VAT threshold worth of earnings a year, you are required by law to register for VAT. If your business earns less than than this a year, you have the choice to register if you want to.
Advantages of registering for VAT
Small businesses who register for VAT before reaching the threshold may benefit in the following ways:
- VAT registration can boost a business's credibility. Having a VAT number can give a business the appearance of being bigger than it really is. This could encourage and reassure potential customers.
- It takes away the risk of a small business accidentally going over the VAT threshold and having to pay fines for not informing HMRC in time.
- Suppliers and organisations are often more willing to do business with businesses registered for VAT than those who are not.
- Registering for VAT enables businesses to claim VAT refunds on products or services they purchase for resale or business use.
Calculating VAT is usually down to the shop or service provider, not the customer. The price advertised on products or services should already include VAT.
So, how is VAT calculated?
You walk into a shop to buy a new television.
- Original selling price of television = £1,000.
- VAT at a rate of 20% (1,000 x 20 ÷ 100) = £200.
- Gross price (final amount you have to pay) = £1,200.
How can an accountant help with VAT?
If you are self-employed or own a business, you may wish to hire an external professional to handle your VAT Returns and deal with HMRC on your behalf. Registering for VAT involves an extensive amount of paperwork - and it simply doesn't appeal to those who wish to concentrate on other aspects of their work or finances.
Hiring an accountant to act on your behalf is advised for overseas businesses who want to trade in the UK (whom HMRC refer to as 'non-established taxable people').
Whether you do business from within the UK or from overseas, you must ensure that you inform HMRC before allowing an accountant to act on your behalf. However, if you are simply hiring an accountant to submit your VAT registration application, you will not need to inform anybody.
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