SEARCH, INDEX, UPDATES, CONTENTS, SERVICES, TAX PLANNING, EFFECT OF VAT, VAT
Introduced in 1973, VAT was originally described as "a simple tax". In concept that may still be true, but it is has some very complex rules. It is therefore very easy to incur an unexpected VAT liability. It is often worthwhile taking professional advice before starting any new activity.
Any business activity may need to be registered for VAT, including "not for profit" activities whether run by a Registered Charity or not.
A VAT registration applies to an individual entity. That entity may be a Sole Trader, a Partnership, a Limited Liability Partnership, a Charity, or a Limited Company. There are special rules for groups of companies. All the activities of an individual entity count towards the Registration Limit, and different activities are reported on the same VAT Return. A builder who also owns a sweet shop has only one VAT Registration, but a builder who runs a sweet shop in partnership with his wife will have to arrange separate VAT Registrations for each entity.
The Registration Limit was increased from £60,000 to £61,000 on 1 April 2006. This is applied in two ways. If the turnover (of the entity) will exceed the limit in a single month or if the rolling total of the last 12 months exceeds the limit. A new business expecting to complete a £61,000+ order in its first month must register immediately. A business which achieves turnover exceeding the Registration Limit by (say) its seventh month of trading must then register.
Some businesses make exempt supplies. These businesses do not have to register for VAT. They treat VAT incurred on expenses as part of the purchase price, in exactly the same way as a private individual who buys clothes incurs the tax.
Many businesses only make supplies which are chargeable to tax. These businesses recover all the VAT they incur on the purchase of goods for resale, on overhead expenses and on capital assets. There are exceptions to this rule -
Some businesses make some supplies which are exempt and others which are taxable. These businesses have to apply the partial exemption rules which are complex.
The distinction be VAT Exempt and VAT Zero Rated often causes confusion. VAT Exempt sales (such as Funeral Services or Insurance) do not charge VAT but the business has suffered VAT on its expenses. VAT Zero Rated sales (such as Food and Childrens Clothes) are fully chargeable to tax, but at 0%. Although no tax is paid by the customer, the business has been able to recover all the VAT it has incurred on its expenses. Zero Rated sales therefore have a lower cost than VAT Exempt sales.
A business which has not achieved turnover of the Registration Limit may choose to voluntary registration for VAT if it is selling to other VAT Registered businesses, because it will be able to lower its costs by recovering VAT on goods purchased and expenses.
VAT charged on sales is called Output VAT. VAT incurred on the purchase of goods and on expenses is called Input VAT.
There are penalties for late Registration for VAT, and interest is charged if VAT Returns and the Tax Payments are late.
See also VAT Flat Rate Scheme, VAT Returns, VAT Bad Debt Relief, VAT Capital Goods Scheme, VAT Car Fuel Scale Charge, VAT Cars including Leased Cars, VAT Partial Exemption, VAT Registration Numbers, VAT Retail Schemes
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 1 April 2006.