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VAT is a tax charged on sales made. A VAT registered business therefore has to charge VAT on sales, but can reclaim VAT on purchases made from other VAT registered businesses. At the end of every three months you have to make a return to the VAT office (a VAT Return) which details how much VAT you have charged and how much you are reclaiming. You will then pay the difference, or if you have claimed more than you charged, the VAT office will send you the difference. In most cases VAT is charged at 17.5% although there are situations where a sale can be either “zero rated” in which case you do not charge VAT but you can reclaim it, or “exempt” in which case you can neither charge nor reclaim VAT. A business must register for VAT once the sales exceed £61000 (as of 1st April 2006) in a year, or else you can make a voluntary registration even before hitting this threshold. Why would you make a voluntary registration? Well, if you are dealing mostly with other VAT registered businesses then you would register to enable you to reclaim VAT on any business purchases you make sure as computer equipment, training courses and so on. If you deal with members of the public, or businesses that are not VAT registered it may or may not be beneficial still to make a voluntary registration. It just depends on how price sensitive your market is, and how much VAT you would be able to claim back. Your accountant will be able to help you make this decision. To register for VAT you can apply on line here. Otherwise ask your accountant or local VAT office to provide you with a VAT 1 form. The registration takes usually about 6 – 8 weeks to come through. There is another potential benefit of being VAT registered and that is what is known as the “VAT Flat Rate Scheme”. This is a simplified method of calculating VAT. You are given a fixed percentage for your particular type of business and then you apply this percentage to your gross sales. You cannot reclaim any VAT on this scheme, but broadly speaking if you do not claim much VAT back anyway you will be better off using the Flat Rate scheme. To give an example, as an IT consultancy the VAT flat rate to use is 13% (all the percentages are here). So, when raising a sales invoice, you still charge VAT at 17.5%, so a sale of £100 would look like: Net Sale £100 VAT £17.50 Gross sale £117.50 When declaring the VAT payment to make to the VAT office you would use the flat rate percentage, so 13% on the gross sale (£117.50) making £15.27 payable, instead of the £17.50 – you get to pocket the difference. Be aware though that unlike the ordinary VAT you cannot claim any VAT on most purchases (except larger capital asset purchases over 2,000 pounds), so before signing up with the Flat Rate, make sure your accountant checks to see whether you would actually be better off. Previous Page
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