Do you ever find yourself wondering why, instead of paying the original or base price of you product, you are paying an additional tax on it?
Well, that additional tax is known as Value Added tax (VAT). It is a tax on the purchase of goods and supplies. And, in this article we are going to take you through everything you need to know about VAT and why you are required to pay it.
What is VAT and why do we have to pay it?
VAT is a tax that you pay in addition to the original value of the goods you purchase and services you avail. By far, VAT is the fairest tax in the history of taxation because it is charged on consumption. So, only the people who have more disposable income and are spending more on non-essential items have to pay VAT.
Introduced in the United Kingdom in 1973, VAT is the third largest source of government revenue after Income Tax and National Insurance. Value Added Tax Act, 1994 governs this tax which is collected and administered by Her Majesty’s Revenues and Customs (HMRC).
As a business, no matter what goods or services you are providing, you are required to pay VAT to HMRC. For this, you need to charge the VAT from your customers, keep the records, and, finally, pay it off to HMRC.
To make the process adding VAT to the base price of the products and services, keeping a record of VAT collected, and easier, HMRC has designed a Digital VAT Software which can be used by every entity charging VAT from its customers.
Does Rate of VAT Vary?
Yes, in the UK, the rate of VAT which is applicable on different products and services vary according to the category they fall in. Here are the various VAT rate divisions
- Standard Rate Goods
Majority of goods and services fall into this category and are subjected to a tax of 20% on the base price.
- alcoholic beverages
- apparel and footwear for everyone above 14 years of age
- electricity, gas, heating oil, and fuel for businesses
- chocolates, cereal bars, biscuits, and other packaged food
- bottled water, carbonated drinks, fruit juices, and other cold drinks
- hot take-away, delivered food, and restaurant food
- privately operated tolls for bridges, tunnels, and roads
- stationary, calendars, and diaries
- Reduced Rate Goods
Reduced rated goods and services are essentials or are good for the environment or society at large.
- Installation of energy saving materials such as solar power plants
- Mobility aids for elderly, sanitary aids, and maternity pads for women
- Electricity, gas, heating oil, and fuel used for domestic, residential, and charity use.
- Car seats for children
- Smoking cessation products
- Exempted Goods and Services
These are the necessary items which are exempted from VAT altogether because they are crucial spending that no individual can go on without or are included under some other taxation head.
- Human Burial and Cremation, Funeral Plan Insurance
- Medical treatment and care; health services such as consulting medical professionals
- Education and vocational training, also in sports
- Cultural events operated by public bodies
- Sale of antiques and works of art by public institutions
- Commercial lands and buildings (leasing/ renting/ selling)
- Gambling: casinos, bingo, betting, lottery
- Financial services
VAT is added to the base price of the product. For instance, if the VAT rate on a service is 20%, then the original value of, say 100 Euros will rise to 120 Euros and you will have to deduct 16.7% percent from the price you are charged to figure out the VAT. VAT is not mentioned explicitly but included in the price.
Also, VAT is charged when a business provides goods or services, applying to both, business and non-business customers. The manufacturer of fruit drinks will charge VAT from the whole-seller, who will them levy the same VAT on the retailer, who, in turn, will receive it from the consumers.
Also, if it a service, the VAT is charged from the customer directly. Like, when you get a haircut done from a salon, the bill includes the VAT within the price.
How to get started with VAT?
Well, if your business is relatively new and your annual sales do not exceed the VAT threshold of 85,000 Euros, you don’t have to register for VAT. Neither can you reclaim the VAT that you’ve paid for purchasing goods and services.
However, when your business grows and your turnover exceeds the VAT threshold, you need to register for VAT.
This means, you can now charge your customers for VAT. Then again, if you are dealing with businesses that are already registered for VAT, they can reclaim their VAT. Also, by these means, you can also reclaim the VAT that you’ve been charged by your suppliers.
Before paying HMRC the VAT that you’ve collected, make sure that you reclaim the VAT that you have been charged, ultimately, reducing costs for you.
If you are under VAT threshold, you can still register for VAT, giving your business a bigger and more established appearance.
Now that you have registered for VAT, you need to start keeping VAT records with respect to every sale you make which should include the details of VAT you’ve charged your customers and those of the VAT you’ve been charged.
How does Making Tax Digital work?
UK government’s new initiative to ease the process of taxation- Making Tax Digital- has come a long way since its advent in April, 2019.
Now, every business with a turnover exceeding VAT threshold will have to submit their VAT records to the HMRC. They should use compatible Digital VAT software for maintaining these records to be recognised.
In a nutshell, VAT is the tax for the consumers which they are paying only when they use their disposable income to avail goods and services. It is a fair tax which allows the economy to advance and public facilities to grow for the betterment of the society.
Therefore, you should check whether VAT applies on the goods and services you deal in, maintain records, and pay whatever VAT you have collected from your consumers to HMRC honestly.