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If you run a business you'll need to know about VAT rates and registration thresholds. There are also some VAT schemes that you might be able to take advantage of to reduce your paperwork and save you time. You can only use some of these schemes if your VAT taxable turnover is below a certain threshold.
Your VAT taxable turnover is the total of sales and certain other supplies you make that are subject to VAT, including supplies that are zero-rated. If you sell goods or services that are exempt from VAT they're not subject to VAT and so they're not part of your VAT taxable turnover.
This guide will also tell you about fuel scale charges, exchange rates and the thresholds for charging VAT on gifts and parties.
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There are different rates of VAT that apply to different types of goods and services. And there are some goods and services that are exempt from VAT.
There are three VAT rates:
The rates of VAT may change from time to time - the changes are usually announced in the Budget. So you'll need to check regularly to make sure you're using the correct VAT rates.
If you're in business, you must register for VAT if your VAT taxable turnover for the previous 12 months is more than £81,000. This figure is known as the VAT registration threshold. The threshold changes - usually once a year announced in the Budget - so you should regularly check your turnover against the current threshold.
You must also register for VAT if either of the following applies:
The deregistration threshold is £79,000. If your VAT taxable turnover for the year is less than or equal to £79,000, or if you expect it to fall to £79,000 or less in the next 12 months, you can either:
If you decide to stay registered, you don't have to do anything.
If you want to cancel your VAT registration you must tell HM Revenue & Customs (HMRC) and explain why your turnover has fallen. For example, you might have reduced your opening hours or lost contracts. You'll also have to give an estimate of your turnover for the next year.
Remember that your VAT taxable turnover includes only the goods and services you sell that you have to charge VAT on, even those that are zero-rated. It doesn't include sales that are exempt or outside the scope of VAT.
Distance selling is when you sell goods from one European Union (EU) country to customers in another EU country who aren't registered - and don't have to be registered - for VAT.
If you're a supplier from another EU country selling to customers who aren't registered for VAT in the UK, then until the value of your distance sales goes over the UK distance selling registration threshold - currently £70,000 - you pay VAT in the Member State in which you're registered.
If the value of your distance sales to UK customers in a calendar year from 1 January is more than £70,000, then you must register and account for VAT in the UK as soon as they go over the threshold. You may apply to be registered for your distance sales in the UK before they reach the threshold. If your distance sales to the UK include excise goods, such as tobacco or alcohol you must register for VAT whatever their value.
You can apply to cancel your registration if the annual value of your distance sales to the UK falls to £70,000 or less and doesn't include excise goods or you expect that your distance sales will be less than £70,000 in the current year.
Each EU country has a distance selling threshold. If you are registered for VAT in the UK and supply goods from the UK to customers in another EU country who aren't VAT registered, you must charge VAT at UK rates until your sales exceed the threshold for that country. Once they exceed the threshold, you must register for VAT in that country and charge their rate of VAT on the sales. You'll have to record your sales for every EU country and check regularly to see if they go over that country's threshold.
You might transfer your own goods to another part of your organisation, or put them in storage, in another EU country. This is treated as if you'd made an acquisition there and you'll have to account for VAT in that country.
You may have to register for VAT if you acquire goods from other EU countries and you aren't already registered for VAT.
You may have to register and account for VAT if you acquire goods (not services) from other EU countries and their total value is over the VAT registration threshold for acquisitions - currently £81,000.
You must register if either of the following applies:
If you're not already registered for VAT you must register as soon as the total value of your acquisitions exceeds, or is expected to exceed, the threshold. You may also register voluntarily where the value of those acquisitions is below the threshold.
You can apply to cancel your registration if the annual value of your acquisitions falls to £81,000 or less or you expect your acquisitions to fall below £81,000 in the next year, unless you would be required to be registered in respect of your UK VAT taxable sales.
The Eighth Directive allows someone registered for VAT in one EU country to reclaim VAT they've paid in another EU country. The Thirteenth Directive allows businesses established outside the EU to reclaim VAT paid within the EU.
You'll have to register for VAT if you claimed, or intend to claim, a repayment under either of these Directives on goods, and both the following apply:
You'll also have to register if the repayment was claimed by someone who then transferred the assets to you under the transfer of a going concern provisions. This applies even if assets were transferred more than once - you may have to check back several transfers.
There's no registration threshold. For any disposal of these assets in the circumstances outlined above, you must register.
If you make supplies of goods to VAT-registered traders in other EU countries, including transfers of your own goods, or you arrange for goods to be delivered direct from your supplier to your customer who is in another EU country, you must complete an EC Sales List (ESL).
You may apply to HMRC for permission to submit a simplified annual ESL provided all the following three conditions are met:
In contrast to standard VAT accounting, there are several alternative ways you can account for VAT that could save you time.
Some of these VAT accounting schemes have been designed for specific trade sectors. Others have been designed to deal with more generic business issues.
These are the current thresholds for the schemes where there are limits or restrictions on when you can join or must leave them.
If you use standard VAT accounting, you have to record the VAT on every sale and purchase you make. You could simplify your VAT accounting by using the Flat Rate Scheme if both of the following are true:
If you use a Flat Rate Scheme, you don't have to keep a record of the VAT that you charge on every sale or pay on every purchase. You calculate your VAT payments as a percentage of your total VAT-inclusive turnover.
Once on the scheme you may continue to use it to account for VAT until your total business income exceeds £230,000.
If you use standard VAT accounting, you have to pay HMRC the VAT you charged on your sales whether or not your customer has paid you. If you use cash accounting, you only pay VAT when your customer pays you. However, you can only reclaim VAT once you've paid your suppliers.
You can use cash accounting if you estimate that your turnover during the next tax year will be no more than £1.35 million.
Once you're using cash accounting, you can keep using it until your turnover exceeds £1.6 million.
If you use standard VAT accounting, you'll have to complete a VAT Return and pay any VAT due, or get any refunds, quarterly. You can reduce your paperwork and make it easier to manage your cash flow by using the Annual Accounting Scheme.
If you use the scheme then you:
You can use annual accounting if you estimate that your turnover during the next tax year will be no more than £1.35 million.
Once you're using annual accounting, you can keep using it until your turnover is more than £1.6 million.
If you're a retailer, and you can't account for VAT in the normal way, you can simplify your VAT accounting by using a retail scheme. A retail scheme can be standard or bespoke.
You can use one of the published schemes if your annual retail turnover - excluding VAT - is under £100 million. There are lower limits for some standard schemes. If your turnover is higher than £100 million, you must agree a bespoke scheme.
If you use a standard retail scheme, you will work out the VAT on your sales by using one of the following methods:
You will move onto a different direct calculation or apportionment scheme if your retail turnover - excluding VAT - rises to more than £1 million.
If you have an annual VAT liability of £2.3 million or more you must make interim payments on account at the end of the second and third months of each VAT quarter. You must include a balancing payment for the quarter (the quarterly liability less the payments on account made) with your VAT Return. The level of interim payments that apply for one year is based on your VAT liability in the previous year.
If your annual liability currently falls below £1.8 million you can apply to stop making payments on account.
The cost of entertaining business contacts and giving them presents is a business expense but it's treated differently from other business expenses.
A business gift is a gift of goods that is made in the course or furtherance of your business, and normally entitles you to reclaim VAT on its purchase.
Business gifts cover a wide range of items from brochures, posters and advertising matter to expensive goods of the kind given as 'executive presents'.
You do not have to account for VAT on business gifts made to the same person where the total cost of all the gifts does not exceed £50 in any 12-month period.
For this purpose, it is acceptable for you to adopt any 12-month period that includes the day on which the gift is made.
Where the total cost of any business gifts made to the same person in any 12-month period exceeds £50 and you have been entitled to reclaim VAT, you will normally have to account for VAT on the total cost value of all the gifts.
You can't reclaim VAT on the cost of providing entertainment unless it's for entertaining your employees. If you entertain both employees and business contacts together, you can only reclaim VAT on the part of the cost that's for entertaining your employees.
If your business pays for road fuel, one way of dealing with the VAT charged on the fuel is to reclaim all of the VAT and pay the appropriate fuel scale charge - this is a way of accounting for output tax on fuel that your business buys but that's then used for private motoring.
When you sell goods or services, you can make out your invoices in any currency, but if you are charging UK VAT, then you must also show sterling figures for the total before VAT and for the VAT. Also, when you keep your VAT accounts, you must convert any amounts in foreign currencies into sterling using an acceptable method. The exchange rates published by HMRC are one suitable method.
Under some circumstances, HMRC may charge interest, known as default interest, or pay interest, known as statutory interest. HMRC is required to apply a formula to calculate the rates for default and statutory interest.