What is VAT and what do you need to know?

Most people are aware of the term “VAT”, but unless you have experience in selling goods, the chances are that your knowledge of VAT and what it truly means is fairly limited. VAT, otherwise known as value-added tax, is a tax put upon products to compensate for any taxpayer-funded services enlisted in their manufacture and distribution and, in the UK, is included within the retail price of goods.

Here, we’ll discuss the ins and outs of value-added tax and answer some of the most frequently asked questions about this tariff.

Does your business need to pay VAT?

If you own a business, you may be wondering whether you need to pay VAT on any goods you buy or sell. Currently, companies who turn over more than £85,000 a year must pay VAT to HMRC, which is recorded and dealt with during quarterly tax returns. Once registered, businesses need to charge their customers VAT throughout the year – in addition to paying other businesses VAT on any goods purchased from them. This needs to be recorded accurately throughout the year so that you don’t end up over or underpaying HMRC.

How much VAT do we pay for goods in the UK?

For countries in the European Union, implementing and paying VAT is compulsory. However, the amount of VAT charged on goods and services depends on individual states who have the flexibility to define their own value-added tax rates – as long as it complies with the EU’s VAT law. Currently, the minimum rate that a member of the EU can charge is 15%, however, some countries do decide to charge significantly more.

In the UK, VAT rates are as follows:

  • The standard VAT rate is 20%
  • The reduced VAT rate is 5% (this rate is applied to some products and services, such as sanitary wear)
  • The second reduced VAT rate is 0% (this rate is applied to some products and services, such as the majority of food items)

It’s important for businesses to note that:

  • The sale of items with 0% tax does need to be recorded on your VAT return – despite the fact that no VAT is actually paid.
  • Items which are exempt from VAT, such as stamps, do not need to be recorded on your VAT return.

Do VAT rates change?

VAT rates do change, so it’s important for businesses to pay attention to make sure they’re charging and paying the correct amount. These changes are usually announced in either March or April, before the beginning of the new tax year, so businesses will need to make sure their sales prices are updated accordingly in order to comply with the new figures.

Understanding the ins and outs of VAT, including all legal processes involved with VAT returns, can be challenging. That’s why, if you’re a VAT-registered business or you predict you may be soon, it’s advisable to hire the services of a chartered accountant to help you with honest and accurate financial advice.

As experienced charted accountants based in Birmingham, we at Barron & Co Ltd are the top choice of accountancy company for businesses in the local area. We have all the expertise you need to navigate through your VAT returns and are dedicated to helping our valued clients with a whole range of financial services. For more information about what we could do for you, please don’t hesitate to get in touch with us at Barron & Co Ltd today.