VAT – what is it and how does it affect my business

Value Added Tax (VAT) is a charge based on a fixed percentage of the selling price of goods and services. Businesses that are registered for this tax must charge it to their customers whenever they make a sale; however, they are allowed to claim back the VAT they pay their suppliers.


How Does it Work?


For example a company buys chairs and sells them directly to consumers. When consumers buy a deckchair, they are actually making two payments in one (although they may not be aware of this): they are paying the retailer for the chair, and they are paying VAT to HM Revenue & Customs. (which the retailer collects, and then sends on to HM Revenue & Customs).


The retailer must also pay the VAT on the cost of the chair from the manufacturer, but they can claim this back. Similarly, the manufacturer must pay the duty on the raw products used to make the chair, but again can claim this back.


In this way, VAT is charged but reclaimed all the way up the chain. In this way, it emerges as a final tax on consumers without being a burden on the finances of businesses (and the length of the production chain is irrelevant to how much irreclaimable tax is paid).


Rates of VAT


At the moment (September 2010) there are 3 rates of VAT in the UK 0%, 5% and the main rate of 17.5%. This main rate will increase to 20% on 4th January 2011.


Your business needs to be registered for VAT if in the last 12 months or in the next 30 days your sales will exceed £70,000


You can of course register for VAT voluntarily – because by being registered for VAT your potential client base can have the perception that you are larger than you actually are.


If you need some help with VAT and don’t know whether you should be registered or not please call Richard Dare on 0845 257 6835