VAT: What is it and why do businesses pay it?

If you are self-employed you may have already realised that you might have to register…

If you are self-employed you may have already realised that you might have to register for VAT. If, however, you’re slightly confused about what this means and how it applies to you, you certainly are not alone.

VAT can seem very confusing when you first begin to look into it, so make sure you know all the facts before you move on:

What is VAT?

VAT stands for Value Added Tax and is applied to many different things. It can be used on:

–       Products

–       Materials

–       Services

–       Entrance admissions

What products are excluded from VAT?

Some products and services aren’t eligible for VAT. These include:

–       Insurance

–       Finance

–       Charity fund raising

–       Membership subscriptions

–       The selling, leasing or letting of commercial properties and land

When do I have to register for VAT?

Once your annual turnover exceeds a certain amount, you must by law register your business for VAT. The threshold for this is £77,000. If you believe that your turnover will go over this amount within one month, you must register for VAT at the beginning of that month so as not to break the law.

Why do I have to pay it?

You must by law register for VAT, otherwise you could be fined a considerable amount by HMRC.

Whether you set up a business, take over a business or have only just built up your business to go over the threshold, it is your responsibility to apply for VAT. If your turnover does not exceed the threshold, you may also be able to apply for voluntary registration which can come with many benefits.

Why would I want to voluntarily register for VAT?

Voluntarily registering for VAT could help to give your business credence, which may make customers trust you more. You might also be able to claim some tax back, which could give you a weighty tax return at the end of the tax year.

However, you will also need to consider these facts:

–       You will need to keep a closer eye on your input and output tax in order to account for everything if you are to claim back tax later on. Input tax is the VAT you pay for supplies for your business. Output tax is the VAT on supplies sold within your business. You may be able to claim back input tax.

–       Your VAT records will also need to be kept one hundred per cent clear.

–       You must send out your VAT returns on time, otherwise you could be fined.

How do I register for VAT?

You can register for VAT online and by post. If you find that the forms are a bit too confusing though, you might want to ask an accountant to help you.

VAT can seem incredibly confusing when you first begin using it, but after a while it will become second nature to you.