If you are considering starting up your own company you probably have some concerns about your tax liabilities – in particularly Value Added Tax (VAT). It´s a complicated area, but in this article we will give you a basic overview to give you a good idea of what you will need to do to account for VAT.
Businesses in the UK that have an annual turnover of £79,000 is obligated to register for VAT. Even if you only anticipate your turnover may be more than £79,000 you are obligated to register your business for VAT with HMRC who will send you a registration certificate with a VAT number, your date of registration and when your first VAT Return must be submitted. VAT Returns required every three months.
How does VAT work?
As you are probably already aware, VAT is usually charged in the asking price of goods by the seller. VAT is thus paid for by the buyer. When you buy goods for business use – resell for example – you can deduct VAT charges.
VAT of course must be included in your accounting so HMRC can calculate the VAT you have already paid and the amount of VAT you can reclaim on your total sales and purchases. Even if you have no VAT to pay you are still required to submit a return.
It should be noted that VAT has three separate rates which often causes complications for business owners that are new to VAT accounting. It is important that you know which VAT you are purchasing or selling goods or services on otherwise you will calculate your tax return in wrong and either lose all or part of your reclaim and induce a fine of at least £100.
The three VAT rates are:
Standard rate – this is the most common type of VAT and is applied to goods and services that fall under this category – rather than reduced or zero rate. Standard VAT is charged at 20 per cent.
Reduced rate – reduced rates is the most complicated to calculate as conditions not only apply to the nature of the goods but on the circumstances of the sale as well. In essence, it is when the goods are mandatory to live. For example, specialist equipment that may be needed for a baby or old age person are charged at 5%. Mobility aids are charged at 5 per cent if they are for customer aged over 60 and the goods are installed in their home.
Zero rate – Goods that are zero-rate taxable means that you have to pay the VAT. All goods are VAT-taxable, but VAT is not always payable by the customer, for example, books and newspapers or children´s clothes and shoes.
If you would further advice about VAT or any other tax questions you may have with regards your small business start-up, contact the qualified and friendly accountants at Taxaccolega 08000 235 234 or email firstname.lastname@example.org today.