Do Businesses Pay VAT?
There is a whole range of things to manage when you are running a business, no matter how small! VAT can be a nuisance to business owners. It’s charged by businesses on goods or services at the point of sale, and as it’s a consumption tax, it’s paid by the end customer, rather than the company selling the goods.
Whether you add VAT at the end check out on your eCommerce store, or have it included in the prices of products or services on your business’s website, all of that is irrelevant because no matter how it is displayed to your consumers, depending on the annual turnover of your business you must legally register for VAT.
There are a few different rates of VAT applicable to different types of products, in different circumstances. While there are some exceptions, VAT applies to almost every single transaction for a vast number of businesses within the UK.
What is a business’s responsibility when it comes to VAT?
VAT-registered businesses have the following responsibilities:
- Must charge VAT on their goods or services
- May reclaim any VAT they’ve paid on business-related goods or services
- Must account for import VAT on their VAT return if they use import VAT this way (known as ‘postponed VAT accounting)
Alongside charging VAT on products and services, businesses must also pay VAT.
So, what are the current rates and what type of businesses have to pay VAT?
So, do businesses pay VAT? Absolutely, and there is quite a bit to keep track of, smaller businesses may struggle to manage all of this. As mentioned previously in the article, there is a threshold that some small businesses may be under, allowing them to have an easier time.
Whether or not your business pays VAT isn’t so much to do with the size of your business as it is to do with your annual turnover. This is referred to as the VAT threshold. In the UK, the VAT threshold is £85,000. Put simply, this means that if your business’s annual turnover is £85,000 or above, you will need to register for and start paying VAT.
The standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%).
Some things are exempt from VAT, such as postage stamps, financial and property transactions. Reduced rate VAT is charged on sanitary products, energy-saving measures and children’s car seats and is charged at 5%. The zero rate, charged at 0% – is applied to most food, books, newspapers and children’s clothes. Although no VAT is charged, the sale of zero rate goods and services still has to be recorded and reported on your VAT return.
Claiming Back VAT As a Business
On the plus side, being VAT registered means you can reclaim VAT on all goods and services your business buys, which means you’re effectively paying 20% less for those goods and services than when your business wasn’t registered for VAT.
Please be careful when declaring your accounts. HMRC inspect these documents and they may impose fines if you have made errors.
When claiming VAT back, you can claim only on goods and services that are used wholly and exclusively for your business, this is normally the downfall of those who find issues with their accounts. By completing your VAT Return online, HMRC will automatically calculate if you’re due a VAT refund for that accounting period. Once you submit your VAT Return, HMRC usually refunds any VAT within 10 days.
Typically, businesses both charge and pay VAT. Depending on the businesses location and annual turnover, this may be slightly different to what we see in the UK. If you have any issues along the way, there are tax specialists out there that can talk you through the process, making it easier to understand!
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