The standard VAT in the UK is 20%. This VAT has significant impacts on small businesses. Yet, some companies hardly pay attention to business VAT.
If you’re a small business owner, understanding how VAT works is essential. So, how does VAT work? Keep reading to know more.
What Does VAT Mean?
Value-added tax (VAT) refers to the business tax that the government levies after the sale of products and services. VAT applies at every point of sale after value addition. Typically, VAT is often a percentage of the entire cost.
VAT in the UK means different things. Besides the 20% standard VAT rate, there are other rates, such as 5% that apply to children's car seats, energy-saving, and sanitary products. There is a zero rate on food, children's clothes, newspapers, and books.
How Does VAT Work?
When one purchases goods or services, VAT becomes part of the price of the products. Your business has to levy VAT on all products. Remitting the tax to the right authority means you’re accountable.
You need to make your VAT payments quarterly, monthly, or even annually. It is crucial to understand how to calculate the VAT. Fortunately, there’s a VAT calculator that can help add VAT or remove VAT.
While small businesses with a turnover that’s less than £85,000 don’t have to register, it would be wise to get VAT regardless of your income. Once you register, your business will have to charge 20% on sales.
You will have several responsibilities as a VAT-registered business. Besides charging VAT on products, you can reclaim the VAT you pay on business-related services or goods. You will also need to report to HMRC the VAT you have charged and your pay-out, which is after every three months.
The VAT you charge on goods should somehow balance with the VAT you pay. If there’s a difference, the VAT tax return sorts it out by paying HM Revenue and Customs.
VAT in the UK is charged on all business sales, commission, sale of business assets, loaning or hiring goods, non-sales such as gifts and bartering, and several business goods. Businesses need to know these taxable supplies so that they can understand how to go about VAT.
What If a Business Is Unable to Pay the VAT?
For £30 billion, companies in the UK will be exempted from VAT until the end year following the growing concerns on the coronavirus pandemic. Other than this period, where the coronavirus has affected the economy, failure to pay VAT is unacceptable. A business that doesn't make timely VAT payment undergo tax investigations, which can result in penalties and interest.
If you find yourself in a situation where VAT payment is becoming a challenge, contact HMRC to have an arrangement for ‘Time to Pay.’ You might also want to consider closure options.
The Query ‘How Does VAT work’ Is Now Answered
Having a company VAT is crucial, especially if you're planning to scale up your business. Yet, the question 'how does VAT work’ is common among young entrepreneurs. Now that you know more about VAT in the UK, how about registering your company?
