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What is VAT?

VAT or Value Added Tax, is a type of consumption tax that is levied on the purchase of goods and services. Most European countries operate a VAT scheme. In the UK it is HM Revenue and Customs that is responsible for the collection of VAT.

From a consumer perspective

As a general consumer we would typically pay the standard rate of VAT (20% - Jan 2016) on most products and services that we use in our day to day lives. Some items are subject to a reduced rate of VAT (5% - Jan 2016) and some items such as groceries are completely VAT exempt.

From a business perspective

If you are running a business then once your business reaches a certain turnover it will be required to register for VAT and thereafter charge VAT on the sales made to your customers. Conversely any VAT paid to your suppliers can be reclaimed and it is the difference between the amount of VAT collected and reclaimed that will make up your VAT liability which must be then settled with HMRC.

As a business it is important to separate out the VAT you collect from your general sales income. VAT is always held in trust, it is not available to spend within your business and will eventually need to be paid to HMRC.

VAT Schemes

HMRC operate a number of different VAT schemes that are catered to businesses of different sizes. An explanation of the different VAT schemes can be found by following the links below:

What are the rates of VAT?

There are essentially three main VAT rates in the UK:
  • Standard Rate (20% - 2016)
  • Reduced Rate (5% - 2016)
  • Zero Rate (0%, surprisingly)

Most goods and services are subject to the standard rate of VAT. The reduced rate is reserved for things like domestic energy supplies and infrastructure. The zero rate of VAT is often applied to food and drink products, baby clothes and some printed media.

VAT Responsibilities

Businesses that are registered for VAT must ensure they take care of the following responsibilities:
  • To ensure VAT is collected on the sale of goods or services
  • To reclaim any VAT on eligible purchases
  • To ensure a VAT return is filed with HMRC on the agreed schedule
  • To maintain accurate, legible records on VAT collected and paid
  • To inform HMRC of any changes to circumstances that may determine what VAT scheme should be used.

VAT Software

These days there are many desktop and cloud based software applications that can assist with VAT accounting. Our sister company QuickFile will allow you to create your own VAT sales invoices and log all VAT related purchases. The software will calculate your VAT return and allow you to submit it directly to HMRC. If you are selling products and services to other EC member states QuickFile can also generate an EC Sales List (ECSL) for you. QuickFile has a completely free tier and is affordable for larger businesses. --Latest--