Understanding Value Added Tax (VAT) in the UK
At its most basic level, a VAT —or value-added tax — is a type of consumption tax charged on items that people buy. Known also as an indirect tax because businesses collect it for the UK government. Businesses must register for VAT if their VAT-taxable turnover is more than £85,000. They can also choose to register if their turnover is less than £85,000. As with any tax, there are a variety of factors that can impact your compliance with tax regulations surrounding VAT. Some of those are outlined below.
How does it work?
When you are a VAT-registered business, you must charge VAT on the goods and services you sell unless they are exempt (more on that below).
Businesses are required to register for VAT with His Majesty’s Revenue & Customs (HRMC). As part of the Making Tax Digital for VAT initiative, all reporting is now done digitally.
As a VAT-registered business, you must:
- Include VAT in the price of all goods and services at the correct rate
- Keep records of how much VAT you pay for things you buy for your business
- Account for VAT on any goods you import into the UK
- Report the amount of VAT you charge your customers and the amount of VAT you paid to other businesses by sending a VAT return — usually every 3 months
- Pay any VAT you owe
The VAT you owe is usually the difference between any VAT you’ve paid to other businesses and the VAT you’ve charged your customers. If you’ve paid more VAT than you’ve been charged, you are generally entitled to a recovery.
Current rate structures and exemptions
The standard rate of VAT for most purchases in the UK is currently 20%. However, there are other VAT rates businesses need to be aware of. For example, a reduced rate of 5% is charged on certain products, including energy-saving measures and children’s car seats. A zero rate – as the name suggests, charged at 0% – is applied to most food, books, newspapers, and children’s clothes. Although no VAT is charged, the sale of zero-rated goods and services still has to be recorded and reported on a company’s VAT return. Some things that are exempt from VAT include postage stamps, financial and property transactions.
There are detailed thresholds for charging and reporting VAT. Details about HRMC’s VAT registration thresholds and VAT accounting scheme thresholds can be found on the gov.uk’s VAT website at: https://www.gov.uk/how-vat-works/how-much-vat-you-must-charge.
Recent trends, including digitalisation
Challenges exist around tax compliance not only within the UK, but also globally, as there are inconsistent standards across Europe and the world. Multiple trends, from global pandemic-related supply chain disruptions, to immigration, to slowdowns in economic activity can cause great fluctuations in the prices of goods and as a result, tax calculations. Another more recent development meant to simplify the process is the broad-scale digitisation of tax reporting and collecting.
As with most digitisation initiatives — and especially those involving government bureaucracies — there are inevitable growing pains. In the end, the digitalisation of processes will greatly transform the ease of dealing with indirect taxes. Currently, VAT activities are divided into three areas: record, validate, and report. The digitisation of VAT means certain areas now require new technology and automation to meet reporting obligations. While automation will simplify many parts of the VAT process, technology will not replace people but rather optimise their time by removing mundane, repetitive tasks from their schedule and enabling them to be more strategic in their overall tax approach.
How can you ensure you are in compliance with VAT regulations?
Software, such as Thomson Reuters ONESOURCE solutions, were designed to do exactly the above — automate the onerous and mundane components of reporting and compliance. Comprehensive platforms such as this can simplify and accelerate the process by automating VAT compliance, and improving the accuracy of tax returns, filings, and reporting. By automating VAT compliance, businesses will submit tax obligations accurately and on time.
In addition to automating the determination and calculation of VAT on all transactions, thereby minimizing the chance of errors, software can create a standardized and repeatable process for preparing and filing domestic and global (I.e., GST or SUT) tax returns by automating the compliance process from source data to submission.
Summary
They say that only two things in life are certain — death and taxes. While we’ve not yet discovered any compelling technological fixes for the first, we are well on our way to a full digitalisation of tax compliance and reporting. For indirect taxes such as VAT, this should make it considerably easier to accurately report and in some instances, refund. There are already excellent solutions that enable you to navigate and automate the complex world of UK tax law.