An Basic Introduction to VAT

“Value Added Tax,” or VAT as it is more commonly known, is a sales tax added to most goods and services sold across the European Union (“EU“). It is paid by the customer to the seller, who then forwards the tax onto the government.

You only have to register with the Revenue for and charge VAT if your sales exceed the annual “registration threshold”. This is a limit set by the government and increases normally each year. It is currently £81,000. If at any point your VATable sales in the previous twelve months exceed the registration threshold, you must register for VAT.

You must keep checking whether you’ve reached this threshold throughout the year, it doesn’t just apply at the year end. You also must register if you expect your sales to exceed the registration threshold within the next 30 days.

It is possible to voluntarily register for VAT if your sales are less than £81,000. In order to register for VAT, you must be providing goods/services that would attract VAT should you be registered.

The standard, normal rate of VAT is 20%. Some goods and services attract VAT at the lower rate of 5% (such as some conversions of properties into residential accommodation), some will have 0% VAT (such as new build residential homes) and some will be exempt from VAT altogether.

To work out the VAT to charge to a customer, let’s say you wish to charge £1,000 for goods/services before adding VAT. This is known as the net amount. The VAT is 20% of the net amount ie £1,000 x 20% = £200. You then add £200 VAT to the price and charge your customer £1,200.

VAT registered businesses can claim relief for the VAT they pay on their business expenses that relate to their VATable sales. You can claim back the VAT on almost all business expenses relating to VATable sales providing you have a receipt that proves there is VAT on the expense, and if it is addressed to someone, it is addressed to your business.

Examples of expenses you can claim VAT on are materials, repairs, tools and equipment, the purchase of vans, stationery, advertising, telephone and rent and utilities of your business premises. You can even claim the VAT on the fuel proportion of mileage (the exact amount depends on the size of the engine). You cannot claim VAT back on a few items such as client/customer entertaining or the purchase of cars.

Assuming the expense is included at 20%, a quick way is to divide the total expense by six. So if you buy something for £60, £60 / 6 = £10. The VAT element is therefore £10.

There is quite a lot of information that must be disclosed on a VAT invoice. The Revenue’s list is as follows which applies to invoices issued to UK customers.

You might find some requirements are not applicable:-

– a sequential number based on one or more series which uniquely identifies the document (this basically means an invoice number)
– the time of the supply (i.e. the date the goods or services were supplied)
– the date of issue of the document (where different to the time of supply)
– the name, address and VAT registration number of the supplier
– the name and address of the person to whom the goods or services are supplied
– a description sufficient to identify the goods or services supplied for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency
– the gross total amount payable, excluding VAT, expressed in any currency
– the rate of any cash discount offered
– the total amount of VAT chargeable, expressed in £ sterling
– the unit price
– the reason for any zero rate of exemption.

There are extra rules if you’re using the margin rate scheme (sometimes used by traders of second-hand goods).

VAT registered businesses must prepare a form called a “VAT return” and file it online with the Revenue every three months. (There are some circumstances in which VAT returns are filed more or less frequently.)

The VAT on sales is called “output VAT” and the VAT paid on expenses is called “input VAT.” The amount of output VAT and input VAT is stated on the VAT return and the difference is paid over to the Revenue. You must also disclose your total income and expenses on the VAT return, along with any sales or purchases to or from the EU.

VAT registered businesses are required by law to keep good financial records and they must be kept for six years. “Financial records” covers anything and everything to do with your business finances. Typical items would be bank statements, invoices, paying in books, bookkeeping records, VAT return calculations and annual accounts.

The Revenue’s definition of business records is wide so if in doubt whether to keep paperwork or not, either keep it or ask your accountant for advice. The business records will be needed to prove the VAT return figures in the event of a Revenue enquiry (and there’s a financial penalty for failing to keep records) so it’s well within your interest to ensure adequate records are being kept.

This may seem confusing to have two descriptions for essentially doing the same thing – selling goods or services without charging any VAT. However, the distinction is important.

If zero rated VAT is charged, this means VAT on the expenses (“input” VAT) relating to that sale can be claimed back from the Revenue. If a sale is exempt from VAT, the input VAT on the related expenses cannot be recovered. This means that for businesses operating predominantly in the zero-rated VAT market – such as new build residential properties – it could be worth the administrative burden of registering voluntarily for VAT in order to recover the input VAT on the expenses. If you think this apply to you, we would be happy to advise you further.