Low Cost, UK VAT Registration Service for UK Ltd Companies, Sole Traders, UK Residents, Non UK Residents and Non UK Registered Companies and Businesses

VAT stands for Value Added Tax

Corporation Tax is a tax on profits. Tax of 19% has to be paid on profits for all UK Ltd companies. If your company does not make a profit then there is no Corporation Tax payable to HMRC.

Value Added Tax (VAT) on the other hand is a tax on sales. It currently stands at 20% of all sales. VAT has to be paid to HMRC regardless of whether your company is making a profit or not.

For example, let’s say that you sell something for £24.00. 20% of that sale has to be paid to HMRC as a VAT payment.

This means that you have to pay £4.00 out of the £24.00 (20%) to HMRC as a VAT payment. This also means that your business only gets to keep £20.00 of the £4.00 that you have collected from your customer for the sale of the item / service. You lose £4.00!

However, there is also an upside to being VAT registered. You can also claim back VAT for payments that your company has made for goods and services to suppliers and general expenses incurred where such payments have been made to a supplier that is VAT registered.

Let’s say that your total sales for 3 months have been £30,000
20% of this figure has to be paid to HMRC as Value Added Tax. i.e £5,000

But if during the same period you have spent £18,000 on supplies and general expenses associated with the business and all of the payments have been made to suppliers who are VAT registered, you can claim back 20% of this figure and net it off against the VAT you are paying to HMRC.

So for example 20% of £18,000 is £3,000
You have collected £5,000 of VAT in sales, but you have paid £3,000 in VAT to suppliers.

After netting off the 2 figures it means that you only owe HMRC £2,000 for VAT

In the vast majority of cases the answer is no. Remember VAT is a type of sales tax. If you are not VAT registered then you do not have to give 20% of the sale of the item to HMRC.

Look at the following 2 examples:

a). In a scenario where your company is not VAT Registered

You purchase a mobile phone from Amazon. The supplier is VAT registered and the phone costs you £100 + VAT i.e £120.00 including VAT.

You now sell this phone on your own website for £200.00

You are not VAT registered which means that there is no VAT for you to pay.

The total profit that you recognise for the sale is £200.00 - £120.00 = £80.00

Please note that if you are not VAT registered not only do you NOT have to pay VAT to HMRC but you also lose the right to claim back the £20.00 in VAT money that you paid to the supplier on Amazon when you purchased the phone.

b). In a scenario where your company is VAT Registered.

You purchase the mobile phone from Amazon. The supplier is VAT registered and the phone costs you £100 + VAT i.e £120.00 including VAT.

You now sell this phone on your own website for £200.00 inc VAT

20% of £200 = £33.33 VAT money owed to HMRC

This means that your business only receives £166.67

However as you are now VAT registered you also have the right to claim back the VAT that you paid the supplier on Amazon which came to £20.00 in VAT

So, let’s now calculate how much profit you have made on the phone.

The phone cost you £120 inc VAT (£100 after you claim back the 20% VAT). You sold the phone for £200 (£166.67 after you pay HMRC 20% of the sale).

The total profit that you have realized for the transaction is £66.67.

Compare this to scenario 4a above where you are not VAT registered and realize an £80 profit for the same transaction.

There are exceptions to the rule and in some cases being VAT registered actually leads to increased profits. For example if you are purchasing goods from UK based suppliers and exporting them overseas you do not have to pay 20% tax on the goods sold. However you still maintain the right to claim VAT on the goods purchased from a VAT registered supplier.

If your overheads and expenses are low then joining a Flat Rate Scheme may also increase your profits as you are charging 20% VAT to a client but passing on a smaller percentage of the VAT money to HMRC.

Also having a VAT number is often a sign of businesses being large and well established. This could attract more buyers and sellers keen to do business with you, in turn leading to increased profits.

It is recommended that you consult a UK qualified Tax Specialist or Accountant for additional and detailed guidance to establish what is right for your business.

Registering for VAT is not compulsory in the UK until your turnover reaches or is expected to reach £85,000 for any financial year. At this stage, by law, you need to register for VAT.

You can register for VAT voluntarily at any time. There are several reasons you might want to do this:

a). Your suppliers are insisting on you being VAT registered before they will deal with you.

b). Being VAT registered is sometimes seen as a sign that you are a large, sizeable and established business which is appealing to both suppliers and customers and can therefor lead to increased sales.

c). You may be involved in a business that is exempt or partially exempt from paying VAT however there may be other benefits that you may be entitled to as a result from enrolling in the UK VAT programme, See here for information.

d). You may be an exporter who does not need to pay VAT but who wishes to claim VAT for goods and services purchased.

e). You have a sizeable number of costs and expenses associated to your business for which you need to claim back the VAT that you have paid to suppliers.

f). You can join a flat rate VAT scheme that may benefit your business if most of your customers are VAT registered,
See here for information.

g). Becoming VAT registered automatically means that you will have to keep accurate records for your transactions. This can make things easy for you a year end when you have to file your annual accounts.

a). You can join a VAT Flat Rate scheme which permits you to collect 20% in sales tax / VAT from your customers but only pass on a smaller percentage of the revenue collected as VAT to HMRC, leaving your business to keep the remainder of the money, See here for information.

b). You can try and target customers who are abroad. VAT cannot be charged on goods that are shipped overseas thereby reducing your VAT bill, See here.

Joining a flat rate scheme permits you to collect a full 20% in VAT money from your customer but then pay a reduced rate to HMRC, allowing your business to pocket the difference.

There are strict conditions for eligibility to join the scheme and you also give up the right to claim VAT on costs and expenses. The flat rate scheme is usually popular with businesses that have low operating costs or a high level of operating costs and expenses for which they are not charged VAT by their suppliers. For additional information See here.

You will need an accountant for this who has access to software recognised under HMRC’s “Making Tax Digital” initiative. The usual process is that an Accountant will prepare your VAT return, ask you to check it and then file it with HMRC. You will then be asked to make a manual payment to HMRC via their website, or via bank transfer or you can set up a Direct Debit. Filing VAT returns can be complicated, especially if you also have VAT to claim (see point 4b below). It is not recommended that you try and file VAT returns yourself. There can be heavy fines and penalties from HMRC if you get things wrong. We can assist you with filing VAT returns and ensuring that you get things right.

VAT returns can be filed monthly, quarterly or annually. By default HMRC set you up on a quarterly filing scheme. You can request to change your filing dates at the time of applying for a VAT number or you can switch to a monthly or annual filing scheme later once you have received your VAT number.

No this is not the case. You still have to pay estimated periodic VAT payments to HMRC. It just means that at the end of the year you have to do all of your calculations just once and then submit them to HMRC and pay them any difference or claim back any overpayments.

Yes, you can. You can go back approximately 4 years with your application (from the date that you apply). Remember, the further back you go the more likely you are to have to pay HMRC backdated VAT payments. Contact us for more information and we will give you guidance accordingly.

Yes you can. You cannot back date the application and all bills have to be settled with HMRC for the duration that you were registered for VAT. After deregistration. We will charge £29.99 inc VAT to submit an application on your behalf if you wish to deregister for VAT.

See VAT Guide Notice 700 published by HMRC Click here.