Biz Tips: VAT Compliance Simplified

Biz Tips: VAT Compliance Simplified


VAT Compliance Simplified

If you’re a budding business owner, you may have heard such buzzwords as VAT, VAT compliance, or the more frightening one — non-compliance penalty. In this article, we set out to explain in the simplest of terms what VAT is, its compliance rules, and whether or not you should apply for it.

By the end, you will have a clear image of what you’re facing.

What Is VAT?

VAT is short for value-added tax. It is a relatively new type of tax, established in the 70s, but one that has become a big part of our everyday life.

With the ordinary sales tax, the tax is paid when the product is sold, only once. With VAT, the tax is paid each time the product is handed over to the next person in the distribution chain, from the manufacturer to the consumer.

However, each of those parties can get a reclaim on the VAT they paid, except for the consumer.

Who Needs to Pay?

Value-added tax was incorporated when the UK joined the European Union. All EU countries must comply with it, and each country has its own rules and regulations that make the compliance process a wholly different experience depending on where you are.

As for eligibility, companies that have a taxable turnover of £85,000 are obligated to apply for VAT compliance. Smaller companies and self-employed parties that have a smaller turnover, but still want to reclaim their VAT, can apply of their own free will.

What Are the Rates?

Not all VATs are the same for all goods and services, of course. They are government-categorised, and fall under two types — either they have a VAT rate, or are exempt from it.

For those goods and services that need to be paid, there are three kinds:

· Zero rate (0%) — health, utilities, foodstuffs, etc.

· Reduced rate (5%) — some aspects of health and education

· Standard rate (20%) — the default rate

The government site has the latest, more detailed information that you can look up on your own, as well.

Should You Apply for VAT?

If you fall into the category of businesses we mentioned above (having a turnover of less than £85,000), you are not obligated to apply. But you might be wondering if it’s good for your business. If you’re on the fence about it, there are main two things to consider.

1. Who are you selling to?

If you offer goods and services to the general public, then it might not be the best idea to apply for VAT. Since consumers are at the bottom of the VAT chain; they are the ones who are paying the tax, with no prospect of reclaiming their money. This means you will have to bump up the prices, which could be detrimental for the business.

However, if you do business with other companies, then they can benefit from their own VAT as well, in which case you could apply without worrying about raising the prices.

2. What kind of business do you lead?

Businesses that sell goods and services with a zero rate, such as booksellers, are actually able to reclaim all their input VAT. In that case, the payoff is well worth the compliance application.

Expert Consultation

One very important thing to emphasise is that you should by no means make any decisions on your own. While reading up on these topics and researching is extremely useful, consider consulting a professional before taking any steps.

A tax expert can look into your specific situation and assess if it really would benefit you to apply for VAT. And if that’s the case, they can help come up with a strategy and all the necessary advice on how to tackle the compliance process.

Returns and Deadlines

VAT compliance includes fulfilling obligations that qualify you for reclamation. These obligations include completing VAT returns and making payments.

VAT returns are completed every three months. You need to keep a close and detailed record of all your sales and purchases, the amount of these taxes you owe, and what amount you can reclaim. Once the necessary paperwork is completed, you must submit it within the specified deadline.

When you’ve applied for VAT, you will fall under one of the several payment schemes. The deadlines for these payments and returns should be honoured, or you will be “surcharged” in the next year. The amount for the financial penalty depends on the company’s turnover that year, and how many trimesters you’ve failed to file a return and pay.

In Conclusion

Value-added tax has become an integral part of the modern market. Knowing how to incorporate it into your business and work around it can make for great strides in your business.

By becoming VAT compliant, you allow your company certain tax benefits, under certain conditions.

All in all, it could be a good opportunity for a small, up-and-coming firm, albeit with proper professional tax guidance.

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