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What is VAT?

The basics of VAT

Value Added Tax (VAT) is a widely used term in the business world, but a few people understand how it works or where it is applicable. In simple terms, VAT is a consumption tax levied on the sales of products or services. It is termed as an indirect tax since businesses collect it on behalf of the government. Since its inception in 1973, VAT rates have changed over the years, and fair to say it’s either gone higher or lower depending on governments priorities, laws as well as changes in the economy.

As a business owner, you need to include VAT in the price of your goods or services, keep proper VAT records and pay the collected VAT to HMRC. The prices marked on items in-stores are VAT inclusive. However, some goods and services for instance dental services are exempted from VAT, while other activities are outside the VAT scope, e.g. hobbies. If you live outside the UK or you are a visitor in the UK, you may get a reimbursement of VAT paid on goods and services.


VAT Rates

There are three types of VAT rates in the UK, they include:

  • Standard VAT rates – Currently 20%
  • Reduced VAT rates – 5%
  • Zero VAT rates – 0%

The customary rate of VAT increased from 17.5% in 2011 to 20% currently. Furthermore, the customary VATrate applies to most goods and services unless the particular goods or services are exempted from a VAT or deemed out of VAT scope.

Reduced VAT rate (5%) depends on the type of item sold or the circumstances surrounding the sale. Such items include:

  • Children’s car seats
  • Domestic fuel or energy costs
  • Mobility aids for older people (for individuals over the age of 60)

Zero rate VAT implies that the goods and services are within the VAT scope (taxable), but rate chargeable to customers is 0%. You have to include such products or services in your VAT records and file them in your VAT returns. These include;

  • Books and newspaper
  • Children’s shoes and clothes
  • Motorcycle safety gears.
  • Most of the goods exported to non-EU countries
  • Goods supplied to an EU VAT registered business
  • Energy-saving home installations
  • Public transport fare
  • Sanitary protection such as pads and tampons
  • Basic or staple food items except for meals in a restaurants or takeaways
  • Some goods provided under special circumstances like equipment for the disabled (vehicles, grab stairs or stairs lift)

These rates are subject to change and in case of any changes; you must affect the changes by configuring your POS on the date of such changes. Medical services and products supplied on health reasons, postage stamps as well as financial and property transactions are exempted from VAT including and should not be included in the VAT records. Furthermore, some goods and services such as legal fees, e.g. congestion charge and vehicle MoT tests are deemed to be outside the VAT scope.


Who Pays and How to Pay VAT

Any business within the UK with gross revenue of above £85,000, the VAT revenue threshold has to register to pay and charge VAT on their goods and services. Business with revenue below this threshold or start-ups may register for VAT on their own will. All the collected VAT must be paid to the HMRC while you are filing the VAT return.

HMRC accepts VAT payment in some payment methods including Faster Payments – online or mobile payment, CHAPS –Online form or direct debit, Credit Cards and BACS among other methods.


Have more questions about VAT or general business accounting?

Great, speak to Vertice Services, we are a reputable accounting firm in the UK focused on helping SMEs like yourself make sense of your accounting stuff. We can advise, manage your accounts, organise your bookkeeping, file to HMRC and of course, do a lot more. Speak to one of our certified accountants today to see how we can help you.

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New entrepreneurs always ask me how long it will take them to start up their businesses. I usually ask them as many questions as I can in order to give a more accurate answer. During our first consultation, I often realise that entrepreneurs have not done enough research or initial study in the market to understand where their businesses will be heading to. The most important lesson you should know about starting up your own business is: Do your research and ask yourself as many questions as you can before you invest a penny.

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9 great ways to raise money to start up your own business

Imagine you’ve had a business idea recently. You’ve prepared your business plan and you know how much money you will need to invest in your business to launch it. But you’ve realised that you don’t have enough money to start. You think about how other entrepreneurs have overcome the same financial challenge when they started their businesses. Should you invest all your savings? Should you invite one of your friends or someone from your family to become your business partner? Should you talk to your personal bank manager? Perhaps an investor?

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Should you start-up your business from home?

We know of many successful entrepreneurs who started their business from home. Steve Jobs from Apple is perhaps the most famous example. I have given advice to many people in the UK looking to start their business from home.

The first thing you need to be aware of is that you can’t start just any business from home in the UK. Most types of businesses in the UK need to have a special licence to operate, or at least a local registration in the Borough Council. You may also need permission from your mortgage provider or landlord to run your business from home.

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Does your business suffer from Seasonality? 

Does your business suffer from an increase or decrease in sales during particular days, weeks or months? If it does, you are not alone. Most of the businesses I have given consultancy or get involved with in a way or another suffer from seasonality.  Factors such as the weather or holiday periods can affect your business performance.

Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes which recur every calendar year. Any predictable change or pattern in a time series that recurs or repeats over a one-year period can be said to be seasonal.
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