Introduction to VAT: Part 1

What is VAT?

“Value Added Tax,” or VAT as it is more commonly known, is a sales tax added to most goods and services sold across the European Union (“EU“). It is paid by the customer to the seller, who then forwards the tax onto the government.

Who has to charge VAT?

You only have to register with the Revenue for and charge VAT if your sales exceed the annual “registration threshold”. This is a limit set by the government and increases normally each year. It is currently £81,000. If at any point your VATable sales in the previous twelve months exceed the registration threshold, you must register for VAT: you must keep checking whether you’ve reached this threshold throughout the year, it doesn’t just apply at the year end. You also must register if you expect your sales to exceed the registration threshold within the next 30 days.

It is possible to voluntarily register for VAT if your sales are less than £81,000. In order to register for VAT, you must be providing goods/services that would attract VAT should you be registered.

How much is VAT?

The standard, normal rate of VAT is 20%. Some goods and services attract VAT at the lower rate of 5% (such as some conversions of properties into residential accommodation), some will have 0% VAT (such as new build residential homes) and some will be exempt from VAT altogether.

To work out the VAT to charge to a customer, let’s say you wish to charge £1,000 for goods/services before adding VAT. This is known as the net amount. The VAT is 20% of the net amount ie £1,000 x 20% = £200. You then add £200 VAT to the price and charge your customer £1,200.

What about VAT on my expenses?

VAT registered businesses can claim relief for the VAT they pay on their business expenses that relate to their VATable sales. You can claim back the VAT on almost all business expenses relating to VATable sales providing you have a receipt that proves there is VAT on the expense, and if it is addressed to someone, it is addressed to your business. Examples of expenses you can claim VAT on are materials, repairs, tools and equipment, the purchase of vans, stationery, advertising, telephone and rent and utilities of your business premises. You can even claim the VAT on the fuel proportion of mileage (the exact amount depends on the size of the engine). You cannot claim VAT back on a few items such as client/customer entertaining or the purchase of cars.

How do I work out how much VAT is in an expense?

Assuming the expense is included at 20%, a quick way is to divide the total expense by six. So if you buy something for £60, £60 / 6 = £10. The VAT element is therefore £10.

In Part two of the blog, we will look at some more issues including what information to state on your sales invoices, the difference between zero rated and exempt VAT and what you will be required to do if you register for VAT.