The tax system that has been incorporated in the UK is as complicated as any national tax system can be, and value added tax, or VAT, is certainly no exception. As a consumer in the UK, you need not worry a great deal about VAT, as it is simply charged to you when you purchase goods and services from a business that qualifies and is subsequently registered for VAT. Unlike many other countries, this tax is hidden in the price that you end up paying for many products. If you plan on opening any sort of business in the future, value added tax is a concept that you definitely must become aware of from an accounting standpoint.
Value added tax is so named because it is a tax based on the value of your sales and the value of your purchases. It is imposed on all goods and services, including trades and on all goods and services imported from all other European Union countries. It is applicable to all goods and a number of services imported for non EU countries as well.
When To Register For VAT
You are required to register for value added tax if your turnover for the past year is at or above £67,000, although this limit does change from time to time. If you expect your turnover to soon exceed this limit, registering for VAT is recommended, though not yet legally mandated. Registration can take place at virtually any time, and is voluntary until it is found that your business requires it. Of note to the consumer, if the business from which you purchase a product is not registered for value added tax, you will likely pay less than if you bought from a VAT-registered company.
Most often, value added tax is charged to the buyer, who is not necessarily registered for value tax, by the seller, who in this case must be. VAT registered persons normally charge value added tax, known as the output tax, on the goods and services they furnish, while reclaiming value added tax, or input tax, when undergoing business expenses. When a buyer is registered for value added tax, the amount paid is sometimes, but not always considered as business expenditure.
If you are solely a consumer, and not registered for value added tax, then you only see the direct effects of value added tax in most of the goods and services you purchase. Of course, in this way you are not ever able to reclaim any paid value added tax.
One can account for value added tax each quarter by simply completing a VAT return and sending it through the post to the HMRC, or Her Majesty’s Revenue and Customs, which handles all matters of value added tax. If your output tax exceeds your input tax, you are required to pay this additional amount. However, if instead your input tax is greater than your output tax, you will be reimbursed this sum.
Current Rates Of VAT
Of course, there are varying rates for different sorts of goods and services that are commonly transferred throughout the UK. As with most consumer-related taxes, value added tax is charged by multiplying the original price of the product by the rate of the VAT, and then adding this amount back into the original product, giving a gross price. This gross price is the amount of the final price charged, unless other taxes happen to be incorporated as well.
Value added tax is not always shown on retail receipts or other documents of purchase, even if it is included. However, if one receives non retail services rendered by a VAT registered business, such as a home renovator, it is required that the amount of VAT incorporated into the price is noted on the bill of service. When VAT is shown on a bill, the 9-digit registration number is also included. If you suspect fraud, contacting the VAT with the registration number you have been supplied is the most sure method of retribution and justice.
The rates charged for VAT fall under three categories. First and most frequently applied of these is standard rate, which is 15 per cent until 1 January 2010, at which point the rate will increase to the former rate of 17.5 per cent. Unless otherwise noted, this value applies to all goods and services.
Then there are reduced rate items, which include such items as domestic coal, petrol, or electricity, the installation of energy saving materials, select residential alterations, women’s sanitary products, and children’s car seats. These are sold at a rate of 5 per cent.
Zero Rated Items
Lastly comes zero rated items, which obviously have no extra rate attached. Zero rated items comprises of goods such as food, books and other such reading material, clothing, certain services for the blind, and sewage services.
There are also items that are not covered under the jurisdiction of value added tax, such as creditor institutions, insurance, charity events, and membership subscriptions to member-based organisations. Education is also usually out of the scope of value added tax, but only if certain conditions are met.
You may be wondering what the difference really is between value added tax and zero rated items, and at first it would seem there is no real one. While zero rated items are taxed for VAT at 0 per cent, items out of the scope of VAT are completely untaxed. What this means for one who sells only zero rated items is that value added tax can still be reclaimed as business expenditure, while those who sell only exempt items may not register for VAT.
Although most citizens would wish not to pay any taxes whatsoever, there are instances when dealing in commercial property conveyance affairs during which it may be a better option to register for value added tax. This, which is referred to as opting to tax, allows a landowner to reclaim, as above, the business expenses that are suffered in the maintenance or cultivation of this land. It is not always the best idea, however, to opt to tax, so a great amount of research and consideration should be employed before making this decision.
For more information on value added tax in the UK, refer to the World Wide Web or your local library.