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What is VAT?

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Business: VAT

Scope

A transaction is within the scope of VAT if:

  • there is a supply of goods or services
  • made in the UK
  • by a taxable person
  • in the course or furtherance of business.
Inputs and outputs

Businesses charge output VAT on taxable supplies and incur input VAT on most purchased goods and services.

Input VAT suffered on goods and services purchased by a business may be reclaimed however certain categories of input tax, such as that in respect of third party UK business entertainment and for most business cars, are excluded.

The difference between the output tax and input tax is accounted for to HMRC, either resulting in a payment or a repayment of VAT for the business. VAT is generally ultimately borne by the end customer.

Points to consider

Supplies

Taxable supplies may be standard rated (20%), reduced rate (5%) or zero rated (0%). Certain supplies are not taxable and are known as exempt supplies.

There is an important distinction between exempt and zero rated supplies.

  • If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.
  • If your business is making zero rated supplies you should register for VAT as your supplies are taxable (but at 0%) and recovery of input tax is allowed.
Registration

VAT registration is required where the value of taxable supplies exceeds the registration limits (£79,000 from 1 April 2013). Registration can also be made voluntarily on taxable supplies below the limit and may be result in a net repayment of VAT if a taxable person is principally making zero rated supplies.

Taxable person

A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered. For the purpose of VAT registration a person includes:

  • individuals
  • partnerships
  • companies, clubs and associations
  • charities.

If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.

Administration

There are certain schemes available to ease the administration of VAT such as cash accounting, annual accounting, and the retail and flat rate schemes. Where no specific scheme is taken quarterly VAT Returns should be submitted within one month of the end of the period it covers.

If you have a further query regarding VAT, please email Eddie Harrington or Cerys Seys Llewellyn or call 01494 552 128.

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