If you’re a business owner, paying VAT on goods and services is all too familiar. The good news is that registering for VAT means you may be able to reclaim some of the VAT you pay (after all, it adds up)!
We’ll look at who can reclaim VAT, how it works and whether you need to be recording it.
Anyone that’s VAT-registered. So, who can register? It’s mandatory to register for VAT if you have a taxable turnover of £85,000, but you can also register voluntarily if you expect to hit the threshold and would like to prepare your business.
Some businesses register early because it helps them to be more tax efficient, allowing them to reclaim VAT on goods or services their business purchases. It’s worth noting though, if you do voluntarily register, you will need to charge VAT on your own goods and services, just like any other VAT-registered business.
Some businesses may be exempt from VAT, for example those which offer educational training, or businesses that deal in insurance. You cannot register for VAT if your business exclusively sells goods or services that are exempt – meaning you’re unable to reclaim it.
If your business sells both taxable and exempt goods, it’s known as ‘partly exempt’.
Is zero-rate VAT the same as VAT exempt?
In short, no. Being VAT exempt means no VAT charges whatsoever can be applied to the goods or services that you sell, whereas zero rated supplies are subject to VAT – but at a rate of 0%.
This means you can leave exempt goods and services off your VAT return, but you will need to report anything that’s zero-rated.
You can register for VAT if you deal with zero-rated goods or services and reclaim any VAT back on purchases you make.
You can reclaim the VAT you’ve paid on anything used exclusively for your business.
If you use something for both business and personal use, you can only claim the VAT back for the percentage that’s being used for work purposes. For example, if you have a home office that takes up 15% of the floor space in your house, you can claim 15% of the VAT on your utility bills.
Or, for example, if you have a phone you use for business purposes and for personal use, you’ll be able to reclaim the portion which relates exclusively to your business from the VAT you pay on the purchase price and service plan. There are some things you cannot reclaim VAT on, including:
- Any goods or services used to make VAT-exempt supplies
- Anything that’s personal use only
- Any entertainment or hospitality costs for the people you do business with – for example, tickets to a football match for a client
- Goods that have been sold to you under the VAT second-hand margin schemes
- Business assets transferred to you as a ‘going concern’
You can reclaim VAT on goods purchased up to 4 years before registering as long as the business still owns them. You can claim back the VAT you paid on services up to 6 months before you registered.
It’s important to know there are different rates of VAT, because once you’re VAT-registered, you’ll be responsible for charging the appropriate rate for your goods and services.
|The goods/services it applies to
|This is the standard and most common rate which applies to the majority of goods and services.
|The reduced rate includes things such as children’s car seats and energy for domestic use.
|You’ll find things like most foods, children’s shoes, books, and clothing in this category.
You’ll add VAT to each eligible sale you make after you register, so you’ll need to create a VAT invoice which shows the amount and rate of VAT your customer is paying.
You’re basically collecting the VAT on behalf of HMRC, but you’re also paying VAT to other registered businesses each time you buy something.
When you prepare your VAT submission, you’ll need to show the total amount of VAT you collected on your sales, and the total amount of VAT you paid on your purchases.
Once you submit it, you’ll either reclaim the difference, or pay the difference.
- You reclaim the difference if you pay more VAT on your business purchases than what you charge to customers.
- You’ll pay the difference if you pay less VAT on business purchases, than you have charged and collected from customers.
Most businesses make VAT submissions quarterly, but this really depends on the VAT accounting scheme you use.
|What to Expect
|Standard VAT accounting scheme
|This is the most common accounting scheme for businesses. You will:
|VAT Annual Accounting Scheme
| If you qualify for this scheme it means:
|VAT Flat Rate Scheme (FRS)
|Some businesses may qualify for the FRS scheme – it is limited though to businesses with an annual taxable turnover of £150,000 or less.
This scheme means you will:
Basically, you’ll pay a lower rate of VAT – which should compensate for the fact you’re not able to reclaim any VAT you pay out!
You can definitely submit a VAT return on your own, although an accountant can offer an extra helping hand through the process. For example, they can help you split the cost of utilities which you’d like to claim VAT for when you have a home office.
They can also help spot an invalid VAT invoice from a supplier (which you wouldn’t be able to use for your claim). So, if your VAT returns are a little tricky, we’d recommend chatting to an expert!
Yes – HMRC requires you to keep VAT records to ensure you’re paying the correct amount of tax. Making Tax Digital for VAT is now upon us, meaning you will have to keep VAT records digitally using compatible software (like Pandle!).
You must keep all your VAT records for at least 6 years, but HMRC may require you to keep them for up to 10, for example if you’re using the VAT One Stop Shop (OSS) scheme.
Need help recording VAT in your bookkeeping? Find out more about our VAT management software, or create an account for free.