In most circumstances, businesses must pay Value Added Tax (VAT) if they earn above the relevant threshold by providing goods or services in the UK and Isle of Man. If the taxable turnover of such a business exceeds the threshold – which at present is £81,000 – in any twelve month period, that business must register to pay VAT. This twelve month period does not have to line up with a single financial or calendar year, but can be any consecutive twelve months.
If you take control of a business that is VAT registered, you will also have to register. Furthermore, if you expect taxable turnover in the next 30 days alone to exceed the threshold, you should register immediately.
These rules apply not just to businesses, but to clubs, institutions, charities and trusts as well as virtually any other organisation. However, some organisations may benefit from a reduced rate or even an exemption.
The VAT rules apply to organisations that provide products or services to consumers or other businesses. The definition used for goods and services is quite broad. For example, an organisation that makes its money through charging people for entry to its premises, such as a museum or gallery, will be liable for VAT under these rules.
The standard rate of VAT is 20%. This is usually added on top of an items price and charged to the consumer as an extra, rather than taken out of a business’ profits. In effect, the business or organisation collects VAT from the consumer on behalf of HMRC.
Some products and services will only be charged a reduced rate of VAT. This rate is just 5%. Among other things, women’s sanitary products, domestic energy, children’s car seats and many residential building works or renovations come under the reduced rate.
A few items or services will benefit from the “zero rate,” which literally means VAT is 0% and is effectively not charged. Children’s clothing and shoes, newspapers or books, and food that is not served in a restaurant or takeaway are just a few examples of 0% goods. Depending on the percentage of sales that fall under the 0% rate, an organisation may or may not be exempt from registering as a result of the 0% rate.
Some organisations choose to register for VAT voluntarily even if their turnover is below the threshold. This is because doing so can actually provide a financial advantage. Barring some potential administration costs, the fact that VAT is added to the standard price of an item means that businesses do not lose out. However, registering makes a business eligible to reclaim VAT paid to other businesses. This can often mean that businesses find themselves better off overall.