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VAT (Value Added Tax)

Tue, 24 September 2002

VAT is tax paid on the value added at each stage of delivery of a product or service.
It is a method whereby businesses act as tax collectors for the Government. If you are registered for VAT, by submitting a VAT return you can claim back what you have paid in VAT, and hand over what you have collected.
 
You must register for VAT if your turnover is over the threshold, currently £83,000 (2017). Businesses must usually submit returns quarterly. Note that this will affect your cashflow if you make large purchases, say, of capital equipment. You may want to time your purchases to minimise the delay before you get your VAT refund.
 
Not all goods are taxable - for example, insurance, some education and training, and postal services are exempt. If items are VAT-able, then, ignoring VAT on fuel, there are two rates - standard (currently 20%), and zero rated. Zero rated items are different from exempt items.
 
It is only necessary to register if your output is taxable. If you do register, you will be able to recover VAT on your purchases including materials, capital equipment and overheads. You will, however, have to charge VAT on your sales. The difference between what you collect and what you pay out in VAT is passed on in due course to HM Revenue and Customs. There is more paperwork involved if you are VAT registered - you need tax invoices showing your VAT number, an analysed VAT account, and VAT return forms. It may, however, be advantageous to register voluntarily if your sales are below the turnover limit, because VAT paid on purchases can be reclaimed. You may also reclaim VAT on capital equipment, raw materials and stocks bought before registration, provided the business still owns them. If you are selling to VAT registered businesses, it is likely to be more attractive for you to register. If you are selling to the general public, it probably will not be. This is, however, an area where you should seek professional advice. You should always seek advice from an accountant or HMRC with regards to tax issues. 

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