For UK registered businesses VAT is basically the acronym of “Value Added Tax”. This tax needs to be disbursed to the UK Government for a sale that’s made by the seller. This tax should not be confused with income tax because income tax is actually deducted from the seller’s pocket. VAT is paid to the seller by the consumer and the seller has to transfer it to the Government. Hence, the seller indirectly acts as a middle man by transferring the VAT from the consumer to the Government. VAT is a form of indirect taxation. This article should provide you a clear idea of VAT registration, benefits of this registration and other issues related to the same.
This tax should not be confused with income tax because income tax is actually deducted from the seller’s pocket. VAT is paid to the seller by the consumer and the seller has to transfer it to the Government. Hence, the seller indirectly acts as a middle man by transferring the VAT from the consumer to the Government. VAT is a form of indirect fixation. This article should provide you with a clear idea of VAT registration, benefits of this registration and other issues related to the same.
#1. Are you legally constrained to register for VAT?
If the total turnover in the past 12 months is more than the mandatory registration threshold, it is compulsory for you to opt for VAT registration. Currently (March 2016), the mandatory registration threshold is £82,000 in a period of 12 months. In case you fail to opt for VAT registration and your turnover has crossed the threshold limit, you may be compelled to pay a certain amount of fine depending on your monetary circumstances. Effective accounts-related software can monitor your turnover and make you aware of that as soon as your turnover gets close to the mandatory registration threshold.
You can also opt for voluntary registration if your turnover hasn’t crossed the mandatory registration threshold.
#2. Who is required to register for VAT?
Any person who’s involved in selling products, goods or anything which is tactile or can be perceived as such can opt for VAT registration.
#3. How can VAT registration be beneficial?
VAT registration has several benefits.
The first and the foremost benefit of it is that it serves to be a Government proof of the business. Your customers will be more than confident in any deals associated with your company because of the legitimacy of your business provided by VAT registration, thereby making you a dependable entrepreneur.
In case you have not registered for VAT and your turnover has crossed the mandatory registration threshold (£82,000), a hefty fine can be levied upon you. VAT registration will monitor your turnover and will promptly provide you a timely warning as soon as your turnover gets close to the mandatory registration threshold.
VAT registration enables you to reclaim a specific amount of VAT from HMRC if your dealings involve any purchase of goods that are levied with VAT.
#4. Is there any other benefit to opt for voluntary registration?
VAT registration also helps in building impressions. It implies that the business turnover of your company exceeds £82,000, thereby making your company look larger and established from the point of view of your customers. If you are not registered for VAT, your customers may get the notion that your turnover is less than the threshold amount of £82,000 which may not look good from their perspective. This can be deemed an indirect benefit but it certainly carries a lot of importance. Hence, it’s better to opt for voluntary registration if your turnover is less than £82,000 to avail of this specific benefit.
#5. What is the amount of VAT that can be reclaimed?
The VAT charged by you is called output tax. The VAT that’s charged from you for your business purchase by any of your supplier is called input tax. This difference is called set-off which is a form of adjusted amount. If the set-off amount is in positive, you can reclaim the entire balance (which is the calculated amount) from HMRC. If the set-off amount is negative, you will have to pay that adjusted amount to the HMRC.
Set-off = Input tax – Output tax.
Let’s say that you paid a total amount of £10 (Input tax) to your supplier as VAT. You charged your customer £5 (Output tax) as VAT. (Input tax in this case exceeds the output tax)
Set-off = £10 – £5 = £5
The set-off amount found is in positive and hence you can reclaim this balance amount from HMRC.
Let’s take another example where input tax is £5 and output tax is £10.
Set-off = £5 – £10 = -£5
The set-off amount is in negative. Hence, this is the adjusted amount that needs to be paid to the HMRC.
#6. Can you reclaim any VAT amount that was paid by you before registration?
Certain conditions apply to reclaim the VAT amount that you had paid before your registration. These conditions are:
- You can claim the VAT amount on goods that were provided to you by your suppliers for your business usage up to four years before the registration date, provided the goods aren’t yet sold.
- You can claim the VAT amount on services that were provided to you up to six months before the registration date.
Another important point to remember is that, once the date of registration is fixed, it’s pretty difficult to change the date to a different one.
#7. What are the available VAT schemes?
There are a variety of VAT schemes available for your choice. 4 popular schemes are mentioned below:
- Accrual VAT,
- Cash Accounting Scheme,
- Annual Accounting Scheme,
- Flat Rate Scheme.
You can get a basic idea of the above 4 schemes here.
The Accrual VAT is the usual VAT scheme and there’s no such eligibility criteria to avail this scheme. The other three schemes have certain eligibility criteria. You should go through the eligibility criteria of Cash Accounting Scheme or Annual Accounting Scheme or Flat Rate Scheme if you want to avail any one of these 3 schemes.
If you want to to know about the VAT rates levied on various goods as well as services, you can go through this article.
VAT registration is generally seen to be a hassle by many businessmen. They think that a lot of paperwork and technicalities are involved for VAT registration which can be difficult to maintain or comprehend. That basically makes no sense because of the benefits provided by VAT registration related to your finance and reputation. If you use a good accounting software, then the paperwork and technical issues won’t be a problem.
Images: ” Value Added Tax VAT Finance Taxation Accounting Concept /Shutterstock.com“
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