Tax is an important part of any company’s finance; not paying or doing so wrongly can lead to unnecessary legal consequences for your company. So, it is important to understand things such as VAT from the outset of setting up a limited company in order to prevent any misunderstandings. It is also important if you are making the transition from an unregistered VAT company to a registered one.
VAT (Value Added Tax) is a corporate tax that companies are required to charge on goods and services if their turnover rate exceeds more than £82,000 in a 12-month period. VAT, like all taxes in the UK, is administered by HM Revenue and Customs.
Registering as a VAT company, even if you earn under the required threshold, is advised as you will then be able to claim back what you have paid to other VAT registered businesses. Often you can pay more VAT to other companies than you receive from the sale of your own goods, so being able to claim this back is vital. This is a vital piece of advice for any company, as you may find yourself losing money as a result of not dealing with VAT as a smaller business than legally required to do so.
You must charge VAT on things such as:
• Business sales – goods and services
• Hiring or loaning goods
• Selling business assets
• Selling items to staff – such as food
You must also account for VAT even when you receive goods or services instead of monetary payment (part-exchange for example). Also, even if you do not charge any VAT to the customer, the price the customer pays is treated as including VAT no matter what.
The appropriate VAT must be added to the normal sale price of your goods and services. There are three rates for goods:
1. Standard Rate 20% – Most goods and services.
2. Reduced Rate 5% – Some goods and services, for example, home energy and children’s car seats.
3. Zero Rate 0% – This includes most food and children’s clothing.
The standard rate of VAT rose from 17.5% to 20% back in 2011. It is important to know the rate at which to apply VAT to your goods and services, especially as there are specific rates for certain trades such as builders and charities. It is also important to note that, for EU members, goods exported outside the EU or in an EU country are zero-rated – subject to conditions.
Registering for VAT
You can register your company with HMRC and it couldn’t be simpler as it is an online process; you simply need to create an online Government Gateway account. Whether you are a sole trader, a limited company or a partnership this still applies to you, however, it is important to note that if you sell only VAT-exempt goods then you cannot register.
You must provide the following information on your VAT form:
• Name of your business
• Date your business was set up
• Contact details
• Applicant details
• Turnover details
• Business activities
Registering for VAT is a fantastic way to improve your company image. Displaying your VAT number will ensure that people automatically assume your turnover exceeds £82,000 a year, which can make your company appear bigger than it is if you registered for VAT voluntarily. It may help you to attract more clients and more valuable contracts. Not registering for VAT will inform everyone, competitors and prospective customers alike, you are earning below the threshold each year.
Submitting the Paperwork
If you are registered for VAT, you will be required to submit an online VAT Return to HMRC every three months demonstrating how much VAT you have charged and paid. This is the case whether or not you have any VAT to pay or reclaim. These Returns should be submitted to HMRC through your VAT online account or appropriate accounting software, it should include your total sales and purchases, the VAT you owe and the amount that you can reclaim.
It is important to note that if you make payments to HMRC it must be within one month and seven days after the end of each VAT accounting period. You must leave enough time for payment to reach HMRC by the deadline – Direct Debit is the most convenient method for this – otherwise you may have to pay a surcharge for late fees.
Understanding VAT is an important step when setting up your company, as it is vital that you pay the correct taxes and understand exactly what it is you have to pay, right from the start.
Rapid Formations are a professional formation company, here to assist with the formation of your business. Allow the Rapid Formations experts to address your compulsory start-up needs, from documentation to handling your VAT requirements.