Q. I recently started a new business as a sole trader and, while I know I am likely to need to register for VAT at some point, I am not sure when this will apply?
A. VAT is a tax levied on the supply of goods or services by businesses. VAT registered businesses are in effect collecting VAT on behalf of HM Revenue & Customs. If a business is registered for VAT, it charges VAT to customers on the taxable supplies that it makes and may be able to reclaim the VAT paid on business expenditure.
A taxable supply for VAT purposes is a supply of goods or services made in the course of business and may be standard rated (20%), reduced rated (5%) or zero rated (0%) depending on the type of goods or services supplied.
Some goods and services are exempt from VAT. Details of these can be found in the guidance issued by HM Revenue & Customs.
Under current legislation, VAT registration is compulsory where, at the end of any month, taxable supplies made during the previous 12 months exceed the VAT registration threshold (backward looking), or where, at any time, taxable supplies in the next 30 day period alone are expected to exceed the VAT registration threshold (forward looking). The VAT registration threshold is currently set at £85,000 and, as announced in the Autumn Budget, will stay at this amount until 31st March 2020. It should be noted that when calculating taxable supplies it is the gross sales value, i.e. turnover, that is used, not profit. Strict deadlines apply for VAT registration and penalties may be charged where registration is late.
In addition to the standard method of accounting for VAT, various special VAT schemes exist, some of which must be applied to certain types of business and others which may be applied, if beneficial.
For businesses which have taxable supplies below the VAT threshold, it may, in some circumstances, be beneficial to register for VAT voluntarily.
VAT is a complex area of tax and professional advice should always be sought based on individual circumstances.
The Office of Tax Simplification (OTS) recently published a report setting out a range of proposals for simplifying VAT – it will be interesting to see what comes of this!
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