VAT

What is VAT?

VAT, or Value Added Tax, is a tax on sales of goods and services. VAT registered businesses collect VAT on the Government’s behalf, by making payments to HM Revenue and Customs.

‘Input tax’ is the VAT a business pays on its purchases and ‘output tax’ is the VAT it charges on its sales. If a registered business receives more output tax from its sales than input tax from its purchases, it has to pay the difference to HM Revenue and Customs. This is the normal trading situation for a pub business.

Sometimes a business may have paid more input tax than output tax, and in this situation HM Revenue and Customs will issue a refund for the difference. An example of this would be where the business has purchased expensive items of equipment on which VAT is charged. The business may have paid out more VAT to the supplier of the equipment than the VAT collected from its own customers.

Rates of VAT

Goods and services that are VAT-rated are called ‘taxable supplies’ and the value of these supplies is called your ‘taxable turnover’. There are three rates of VAT in the UK:

17.5%	(known as standard rate);
5%	(known as reduced rate);
0%	(known as zero-rate).

There are also other goods and services on which VAT is not charged, these are known as ‘exempt supplies’.

Examples of reduced rate items:

• fuel and power used in the home;
• women’s sanitary products.

Examples of zero-rated goods are:

• most food (except meals in pubs, restaurants, cafes and hot take-away food and drink);
• books;
• newspapers;
• children’s clothing and shoes.

Examples of exempt items are:

• insurance;
• betting, gambling and lotteries (but not takings from fruit machines);
• certain types of education and training.

When do you need to register for VAT?

Registering for VAT is compulsory for businesses with an annual turnover above the VAT threshold. (In 2007, this figure was £ 64,000 but this is regularly revised.) Businesses with a turnover of less than the VAT threshold can register for VAT voluntarily, which can be advantageous in some cases. For example, a business with higher than average input tax payments and lower than average output tax, may find it beneficial. Businesses under the VAT threshold may also consider that VAT registration gives them more credibility in the eyes of customers and suppliers.

How do you register for VAT?

You register for VAT by completing form ‘VAT 1’, plus:

• VAT 2 – if your business is a partnership.
• VAT 68 – if you are taking over an existing business and wish to keep the previous owner’s VAT number.

Forms must be sent to the HM Revenue and Customs office that is responsible for businesses in your postcode area. You can also register on line via the HM Revenue and Customs website: www hmrc.gov.uk

You should be sent your VAT registration number within 3 weeks of registering.

Failing to register

It is important that you register at the correct time as you may receive a financial penalty if you fail to do so. The amount of the penalty will depend on how late you are. You will be registered from the date you were liable to be registered, and you will have to pay VAT to HM Revenue and Customs even if you did not charge it to your customers.

What must you do once registered?

Once you have registered for VAT, you must charge VAT to your customers, keep proper records and accounts for VAT, and send in VAT returns regularly.

You must ensure that any invoices you receive from your VAT-registered suppliers display their VAT number and you must do the same for any invoices you issue.

VAT returns

The VAT return (form VAT 100 or Welsh equivalent VAT 100W) is the form you use to notify HM Revenue and Customs of the amount of VAT you are submitting for payment or are claiming back. You will normally receive these every 3 months, for the period known as your ‘tax period’. You can arrange for VAT returns to be issued on a monthly basis, if you wish.

You will be required to complete the return with details of the value of goods you have bought and sold and the respective VAT due, or being claimed. You can also now send in VAT returns via the HM Revenue and Customs website.

Different VAT schemes

Accounting for VAT in the standard way can be time-consuming. However, there are alternative VAT accounting schemes that may suit your business better. These include:

• Annual Accounting scheme (you must have been registered for 12 months or more to apply).
• Flat Rate scheme (your total turnover must not exceed £ 187,500 – as at 2007).
• Retail schemes (a range of schemes is available to different retailers).

Your accountant will advise you on which scheme will be most suitable for you to operate.

Putting money aside to pay your VAT

If you have set up to pay VAT on a quarterly basis, it is good practice to set some money aside each week to cover your anticipated VAT payment, rather than having to find the money at the end of the quarter. To do this, open a savings account and pay into it between 6% and 7% of your weekly takings, which will approximately cover your quarterly VAT payment.

Using the services of an accountant or book-keeper

The majority of licensees use the services of their accountant or qualified book-keeper to register them for VAT and ensure that VAT is correctly calculated for their VAT returns. Unless you are confident that you have the time and the ability to do these, you are advised to leave this aspect of your business to the professionals.