VAT stands for Value Added Tax, and it is a levy on the sale of goods and services. Companies will add VAT onto the price they charge customers for these.
VAT was introduced to ensure that taxes on sales were being collected fairly. The way it works, although somewhat convoluted, removes incentives to lie about sales, and stops sellers being responsible for collecting tax.
The amount of VAT that a business must pay to HMRC is calculated by taking the amount of VAT that a business has paid, and then subtracting the amount of VAT that the business has made by selling to consumers.
HMRC will then, as a result of filling out a VAT return form (see below), make up the difference.
Rates for VAT
There are different rates for VAT, and at the time of writing, they are:
- 20 per cent – the standard rate
- 5 per cent – the reduced rate
- 0 per cent – known as zero rate
The rate of VAT charged depends on the item being sold. Protective boots for industrial use, and similar items, are in the zero rate, while children’s car seats and other similar items are in the reduced rate.
What is a VAT Return?
Every three months (known as an accounting period), a business will submit a VAT return form to HMRC. This form will indicate how much VAT you will be paying.
Your VAT return records the amount of VAT you owe, the amount of VAT you are able to reclaim, how much your refund from HMRC is, and also your total purchases and sales.
Even if you do not have VAT to either pay or reclaim, you must submit a VAT return to HMRC.