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What Is VAT?

Introduction to what is VAT

This is a big area for a lot of businesses and one that causes much confusion to contractors, freelancers and small businesses.

VAT is a sales taxintroduction to what is vat

Essentially, VAT is a sales tax, which you collect by charging it on top of your invoice value.

If for example, your “net” invoice value is £1,000 + VAT you would charge 20% on top of the invoice, i.e. a total ”gross” value of £1,200.

What about VAT on my expenses?

As we just said, VAT is a sales tax. However, as well as charging VAT to your customers, you also pay VAT on certain purchases and expenses, such as rent, equipment, etc.

VAT you charge your customers is called “Output VAT”, and the VAT you pay on your purchases and expenses is called “Input VAT”. The difference between the two is what you owe to HMRC.

When do I need to register for VAT?

Currently, it is only compulsory to register for VAT when your sales pass the £77,000 threshold.

Once registered, you must charge VAT on your sales and you can claim back VAT you have paid on purchases and expenses.

A good accountant can take care of your VAT registration for you. Typically registration can take between 2-4 weeks, but is dependent on HMRC’s internal processes.

Can I register for VAT if my turnover is below the threshold?

If your turnover is below the threshold of £77,000, you can still register for VAT – this is called voluntary registration.

It can make sense to do this if:

  • You are a contractor or freelancer with low expenses compared to turnover
  • You make zero rated sales
  • You want to appear bigger than you are

Do I always charge 20% on sales?

Actually there are different rates of VAT, depending on the goods or services you sell. The rates for different goods are:

  • Standard rated – 20%
  • Reduced rated – 5%
  • Zero rated – 0%

So for example, if you have a sale of £1,000, you would add 20% of this as the VAT element, and you must clearly separate the VAT element on the invoice. So the total would be £1,000 + £200 = £1,200.

What is a VAT return and when do I file it?

VAT returns are where you report your “Output VAT” and “Input VAT”. Remember the difference between the two is what you pay to HMRC.

You must file a VAT return and pay the VAT each quarter. This has to be done online and a good accountant will do this for you. The return is actually due one month and seven days after the end of the VAT period.

So for example:

VAT Quarter Ending

  • 31 January
  • 30 April
  • 31 July
  • 31 October

VAT Return & Payment Due

  • 7 March
  • 7 June
  • 7 September
  • 7 December

Next: “What are the different VAT schemes?”

Any questions? Speak to one of our friendly accountants on 020 7969 2879.