Navigating the Complex World of VAT: What You Need to Know

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The complex world of VAT can be daunting for companies, no matter their size. Whether you’re just starting out or you’re a well-established business, understanding the ins and outs of VAT can be difficult to process.

In this blog, we explain VAT and the importance of adhering to UK tax regulations.

What is VAT?

Value Added Tax (VAT) is a consumption tax that’s charged on the value added to most goods and services. It is typically added to the price of the product or service and is paid by the customer at the point of purchasing an item. The seller collects the VAT and must remit it to the government. Businesses that are registered for VAT can reclaim the VAT that they pay on their own purchases and expenses, which can help to reduce their overall VAT liability. VAT was introduced in 1973 when we joined the European Economic Community.

VAT is designed to be a fair and efficient way to raise revenue for the government. It is a complex area of taxation. Businesses that are required to register for VAT must follow strict rules and guidelines to ensure compliance with the law.

Due to these complex rules, VAT is best left in the hands of an expert. MW Accounting Services provide professional VAT services. If you need help with your business’s VAT, our expert team can help. Here at MW Accounting, alongside tax advice in Milton Keynes and the surrounding regions, we also provide help with payroll, business start-ups and bookkeeping in Milton Keynes and beyond.

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How does VAT work?

Businesses that are registered for VAT add VAT to the price of the goods or services that they sell. They will hold this VAT that they collect in a separate VAT account. Businesses can also reclaim the VAT they pay on their own purchases and business expenses. At regular intervals, the businesses must submit a VAT return to HM Revenue & Customs (HMRC) and remit the VAT that they have collected to the government. If the amount of VAT that they’ve collected is greater than the amount of VAT that they’ve paid on their own expenses, then they pay the difference to HMRC. If it’s the other way around, they can claim a refund from HMRC.

How much is VAT in the UK in 2023?

The rate of VAT in the UK is 20%. The UK government can change this VAT rate at any time depending on economic conditions and policy objectives. Any changes are announced in the Budget or Autumn Statement.

There are 3 VAT rates in the UK; standard rate, reduced rate and zero rate. The standard rate is 20% and this applies to most goods and services. The reduced rate is 5% and this relates to certain products such as children’s car seats and domestic fuel and power. The zero rate applies to specific goods such as children’s clothes, books and newspapers.

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When do businesses need to register for VAT?

If your taxable turnover exceeds the VAT registration threshold of £85,000, you need to register for VAT. The turnover threshold is measured over a rolling 12-month period. The only exception is if everything the company sells is exempt from VAT. If your turnover is below this, you can choose to register voluntarily. Your company may wish to do this if they want to reclaim VAT paid on their business expenses if their suppliers prefer working with VAT-registered companies or to give the perception to customers of being a larger, more established business.

When a company registers for VAT, they are provided with a unique VAT number. This is the VAT Registration Number and is 9 digits long.

How do I register for VAT?

The process for registering is simple and can be done online. You need your turnover, bank and business activity details to complete the process.

What are VAT returns?

VAT returns must be submitted to HMRC on a regular basis, usually quarterly. The VAT return shows the amount of tax charged by businesses, the amount of input tax paid by the business and the amount of VAT that the business must pay to HMRC. It’s vital that VAT returns are submitted on time and that the amounts are correct. If you’re not compliant you can be fined or even face legal action.

Making Tax Digital (MTD) for VAT was introduced in 2019. All VAT-registered businesses must keep digital tax records and use MTD-compatible software to electronically submit their VAT returns.

What are VAT penalties?

It is a legal obligation to be registered for VAT based on the criteria outlined. If you don’t adhere to this, you can be fined or, in worse case scenarios, be given a custodial sentence. The penalty is based on a percentage of the VAT due. HMRC take VAT compliance seriously so specialist advice is recommended.

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Why should I use an accountant for VAT services?

An accountant can:

  • Identify if you need to register for VAT or not
  • Help you to understand your VAT obligations
  • Calculate the amount of VAT you need to charge
  • File your VAT returns accurately and on time
  • Provide advice and guidance on VAT-related issues
  • Save you time
  • Identify opportunities to save money on VAT by taking advantage of VAT schemes and exemptions
  • Ensure that you are compliant

Due to the complicated rules and regulations, using a specialist in VAT can be advantageous. We at MW Accounting Services can make sure you follow them so you don’t incur penalties or fines for not doing so. It will give you that peace of mind that your VAT affairs are being handled by someone knowledgeable and experienced in the area. VAT compliance is time-consuming. Let us take this burden away from you, so you have more time to focus on your company. We can also offer expert tax advice in Milton Keynes and beyond. Come to MW Accounting Services for VAT, payroll and bookkeeping in Milton Keynes. We’d be happy to help your business.

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