Navigating VAT – What is VAT, and What are the different schemes?

If you’re a business owner, you’ve probably heard of VAT (Value Added Tax)

But what is VAT?

VAT stands for Value Added Tax. It is a tax which is added to the price of goods and services when they are sold. The tax is calculated as a percentage of the value of the goods or services. The percentage differs depending on the type of goods or services. In this article we explore navigating vat issues.

The standard rate of VAT in the UK is 20%, meaning if you buy goods worth £100, you will pay an extra £20 in VAT. The standard rate of VAT applies to most goods and services. Examples of goods and services that fall under the standard rate include electronics, adult clothing, furniture and non-essential food items.

VAT Exceptions

There are exceptions to this, as some goods and services are subject to different VAT rates.

Reduce Rate (5%). The reduced rate of VAT is 5% and applies to specific goods and services such as domestic fuel and power, some repairs and renovations to residential properties and children’s car seats.

Zero Rated (0%): The Zero Rate of VAT applies to essential goods and services; this means that no VAT is chargeable. Examples of Zero rated products include food items (essential), books, children’s clothes and shoes, water, and public transport.

Exempt: Exempt items are goods or services that you don’t pay or charge VAT, but they still need to be accounted for in your VAT return; examples of Exempt items are postal services, health services, insurance and financial services.

The difference between Inclusive and Exclusive

When working with VAT, it’s important to know the difference between VAT Inclusive and VAT Exclusive. VAT Inclusive means that the price already includes the VAT amount. For example, if the total is £100, the net price would be £83.33, and the VAT amount would be £16.67. If the price is £100 VAT exclusive, this would mean that VAT still needs to be added to get the total price of £100 net plus £20 VAT (Assuming the Standard VAT rate applies) equals the total of £120

A business with a turnover of £85,000 over a rolling twelve months must register for VAT Businesses can also voluntarily register for VAT if their turnover is below the £85K threshold. Businesses that are registered for VAT must charge and pay VAT to HMRC on their goods and services; however, they can also claim back the VAT they have paid on their business expenses.

Navigating VAT Schemes

There are different VAT schemes available to small businesses, and each has its own benefits.

Standard VAT Scheme (Accrual Scheme)

This is the most common VAT scheme in the UK, Businesses registered with this scheme charge and pay VAT to HMRC on their sales when they are invoiced and then claim back VAT on their purchases, including purchases that are invoiced and unpaid.

Cash Accounting VAT Scheme

This Scheme allows businesses to pay the VAT on their sales only when they have been paid, and VAT can also only be claimed back on expenses which have been paid. Businesses can only use this scheme if their annual turnover is £1.35 Million or less.

Flat Rate Scheme

Under the flat rate scheme, businesses pay a reduced fixed rate of VAT based on their turnover, and the business doesn’t claim the VAT back on their purchases. The percentage paid depends on the type of business. For example, a consultant will pay 14% on all sales, and retailers would pay 7.5% on their sales. To join the flat rate scheme, your expected VAT taxable turnover must be £150,000 or less.

Annual Accounting Scheme

The Annual Accounting Scheme allows businesses to make advanced payments throughout the year based on their estimated turnover. At the end of the year, they make a final payment or receive a refund based on the actual turnover. This scheme is available to businesses with a turnover of £1.35 Million or less.

Managing VAT can be a complex and time-consuming task with multiple VAT rates, schemes, an endless list of exemptions and ever-changing regulations; it’s easy to become overwhelmed and make mistakes. The team at Direct Peak have a wealth of experience dealing with VAT and navigating VAT issues – Get in contact with us today if you would like help managing your VAT