VAT stands for Value Added Tax and is a tax on consumer expenditure. VAT is applied to goods and services and currently stands at 17.5%.
Between the 1st of December 2008 and the 31st of December 2009 VAT was cut to 15%. This was a measure introduced by the government and the bank of England to help alleviate the pressures of the recession. The change meant that consumers could buy products for more cheaply if businesses decided to pass on the savings.
VAT rates are not frequently changed and although the cut in VAT was welcomed it did present some problems for retailers. This is because they had to reset their till systems and change their invoicing figures. Difficulties were particularly prevalent online. This is because many people have websites built for them and don’t have the skills to make the changes themselves. To get the required changes many businesses had to pay developers to make them for them.
VAT must be paid by businesses that have turned over more than £68,000 in the last twelve months. This figure is known as the VAT threshold and is usually changed once a year at the yearly budget announcement. These changes mean that businesses should regularly check whether they are above or below the threshold. If your business goes below the threshold then you will need to cancel your VAT registration.
HM Revenue and Customs also run VAT schemes which can offer significant benefits to businesses. You will need to work out which scheme suits you best but generally they can help you account for only VAT that has been paid. This can help with cash flow.
As with many things with accounting it is important to keep accurate records. It is a legal obligation and therefore mandatory that businesses keep accurate VAT records. These records need to be kept for five years and penalties can be applied to businesses that have poorly kept records. Businesses that keep accurate records will avoid paying too much tax.
In 2009 a new VAT penalty system was introduced. The new system looks at two areas and penalises people for not sending in VAT returns and sending in assessments that are lower than what it should be. Penalties usually come in the form of a fine.
VAT and tax is a complex area and at VAT 15 we try to make sense of the process. After all businesses of all types including umbrella companies, digital agencies, food restaurants and high street stores need to understand these rules.