Standard, reduced, zero-rated and exempt
VAT at the standard rate – currently 20% – is charged on the sale or provision of most goods and services. A VAT registered business charges VAT on its sales (output VAT) and is able to reclaim the VAT it has paid on goods and other expenses incurred for its business (input VAT).

A reduced rate of 5% applies to a few goods and services. Some goods and services – such as prescriptions dispensed by a registered pharmacist – are zero-rated, meaning that while their supply is strictly liable to VAT, the rate at which the VAT is charged is 0%. Suppliers of reduced and zero-rated goods and services are still able to reclaim the VAT paid by them on their business purchases.

VAT is not charged on the provision of exempt goods and services – such as health services provided by registered doctors, dentists, opticians and pharmacists – and generally the VAT paid on expenses incurred in the provision of those goods and services cannot be reclaimed.

The VAT paid on goods and services that are used for non-business activities cannot be reclaimed.

Registration requirements
A business providing goods or services to which VAT applies has to register for VAT if its turnover from taxable supplies – including standard, reduced and zero-rated supplies – has exceeded the VAT threshold (currently £79,000) in the previous 12 months or if its turnover is expected to exceed the threshold in the next 30 days.

A business making taxable supplies may choose to register for VAT, even if it is not obliged to, in order to be able to reclaim the VAT on goods and services purchased for its business.

To register for VAT, the business submits form VAT1, although most businesses can now register for VAT online. Where an existing VAT-registered business is taken over, the new owner must register if his turnover plus that of the business taken over exceed the threshold (or are expected to exceed it). The new owner can apply to keep the existing VAT registration number if the seller agrees.

If a business registers late for VAT, it will be liable to account for VAT from the correct date and in addition may be charged a penalty.

VAT administration
VAT returns detail output VAT charged on supplies and input VAT suffered on purchases and other expenses. The excess of VAT charged over VAT reclaimed is payable to HMRC. VAT returns and payment are generally due quarterly and almost all businesses are now required to file their VAT returns online and pay their VAT electronically.

You may choose to have an accountant or other adviser dealing with your VAT on your behalf, otherwise if you are dealing with your own VAT, then before you can use HMRC’s VAT online services, you will need to sign up with HMRC Online Services – see www.hmrc.gov.uk/vat/start for instructions. You can also sign up for email reminders to let you know when your VAT returns are due.

Simplified VAT schemes
Several schemes exist to make accounting for VAT easier.

The annual accounting scheme is open to businesses whose turnover is not more than £1.35m. It involves making either 9 monthly or 3 quarterly instalments of VAT, based on the previous year’s liability, and one annual VAT return, showing the whole year’s figures, plus a balancing payment (a refund is made of the instalments paid are more than the actual figure). The scheme is not advantageous for businesses which usually reclaim VAT each quarter as a refund would only be made annually.

Usually VAT is payable on sales in the quarter when the invoice is issued. Under the cash accounting scheme, however, VAT is payable only when the business receives payment; similarly, VAT can only be reclaimed when purchases are actually paid for. Again, the cash accounting scheme is open to businesses whose turnover is not more than £1.35m.

A business may join the flat-rate scheme if its turnover is less than £150k and may stay in the scheme until its turnover reaches £230k. The business pays VAT on its turnover at a fixed rate depending on the type of business and VAT is then not reclaimed on purchases. The scheme may not be suitable for businesses which make exempt or zero-rated supplies in addition to standard-rated supplies as the flat rate is applied to total turnover.

There are various detailed conditions attaching to each scheme – for more detail on these and all the points covered here go to www.hmrc.gov.uk/vat .

This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here.

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk