VAT - What it is and how do I register?

If you're a small business, chances are, you're not charging VAT (Value Added Tax) but you are paying it to your suppliers. As a result, you could be charging the gross amount (that's the price after VAT has been added), to your customers. It's a complex area of the tax system and requires a bit of knowledge to get your head around it.

What exactly is VAT?

VAT, is a tax which is added to products and services by VAT registered businesses. The amount charged varies depending on the country in which you operate, the products you sell and what type of products they are. For example, a physical item is taxed differently to a digital item (known as VAT MOSS, or Mini One-Stop Shop), and the rules for tax on food is different to those for a vacuum cleaner or kettle.

Most countries operate a VAT scheme of some sorts. In the UK it's managed by HM Revenue & Customs (previously known as Inland Revenue).

From a consumer's perspective, they pay VAT unknowingly. A supermarket for example lists the price inclusive of VAT. For a business however, VAT can only be charged if you're registered. As many businesses are registered for VAT, their services are often advertised excluding any VAT.

At the time of writing, VAT is mainly charged at one of three bands - zero-rate (0%), reduced rate (5%) and standard rate (20%). Which percentage is charged depends on the product itself. Groceries for example are generally zero-rated (but takeaways aren't), whereas children's clothing is often 5%. If you sell digital products to customers outside of the UK, then VAT MOSS comes into play, and you have to charge VAT at the rate that is relevant in the customer's country.

Confused? It can be hard to get your head around it all, but there are accountants out there with many years of experience who can help you with this should you have any queries.

Find an Accountant

Do I have to register?

There are two types of VAT Registration - voluntary and mandatory. If your sales turnover exceeds £83,000 or is predicted to do so in the near future, then you need to register. However, if your sales turnover is below that, that you can still register on a voluntary basis.

Why would I want to voluntarily register to pay a tax?

It's a good question. There are several benefits to voluntarily registering for VAT:

It hides your turnover from your clients (no one will know your turnover is less than the threshold)
If your input tax (that's what you pay out to suppliers) is more than your output VAT (that's the VAT you charge customers), then you may be able to claim it back
No stress when you hit the threshold, and no risk of late registration penalties

How do I register?

You can register online, although there are exemptions to this. If you meet one or more of the exemptions, you must register by post (there's a list on the gov.uk website). The application form, called VAT1 can be downloaded on the gov.uk web site too, along with it's guidance notes. You can find these here.

Registering Online

You have two options when it comes to registering online - you can either register direct with HMRC on their website, or you can use an agent. The Company Wizard has a sister site, VAT-Registrations.co.uk, which can help you through the process.

You may find that your accountant may be able to help you register for VAT too.

Start an Online Application with VAT-Registrations.co.uk

VAT Returns

Once you have registered for VAT, you will need to submit a quarterly return to HMRC. This is known as your accounting period and will span 3 months. The return covers things such as:

your total sales and purchase value
the amount of VAT you are able to reclaim on purchases
the amount of VAT you owe from sales
the amount, if any, of VAT refunded by HMRC

Online accounting software can help you keep on top of this and keep track of your sales too. But you can also sign up for reminders on the HMRC website.

Conclusion

There isn't much to registering for VAT, but a lot more to the concept of the tax itself. It's a complex area that requires a bit of knowledge, but the basics can be picked up fairly quickly, especially if you use accounting software that has the capabilities of handling VAT.

Of course, we like to help businesses with a number of different areas, so between The Company Wizard and it's sister company QuickFile, we can help you register and manage your VAT invoices and returns simply.