The Complete Guide To UK VAT 2018 (With Calculators)
Chances are you’ve heard of UK VAT but what does it mean – Very Angry Taxman, Veritable Assortment of Toffees, Vanquish All Tambourines? When you first start working for yourself getting to the bottom of the taxes you’ll have to pay, how and why you pay them is enough to make your head spin. There’s plenty of advisors out there, offering comprehensive tax guidance for the price of a small flat, or like the frugal panda you are – you could simply keep reading the Hatch blog – we’ll take you through the A-Z of UK VAT for free (unintentional rhyme).
What is UK VAT?
UK VAT (Value Added Tax) is a tax applied on the sales of goods and services. This means that you’ll have to pay VAT on any of the goods or services you buy. You’ll also charge VAT on the items or services that you sell.
The idea is the VAT that you pay and the VAT you charge balances out – but in reality it doesn’t happen that often, which is why HMRC require all VAT registered businesses to file a VAT return so that they can either pay or reclaim the tax.
How to register for VAT
The UK VAT threshold is £85,000, so if you’re going to be turning over more than £85,000 (go you!) then you will need charge your customers VAT. If you decide to sign up for UK VAT you’ll probably find it easiest to register online. Most businesses will only need to complete one online form, however if you are in a partnership you will have to complete an additional form detailing the partners in the business.
If you need to apply for basic UK VAT then you need to complete the VAT1 form on the HMRC online. In a partnership? Then you will also need to complete a VAT2 form alongside the VAT1 form and post it to HMRC (a little bit of snail mail never hurt anyone eh?).
Another thing to note is that if you are going to be doing business internationally you will have to complete a form for ‘VAT for acquisitions’ which will also have to be posted to HMRC.
UK VAT Rates 2018/19
VAT rates vary for different business sectors, but essentially the rates are:
|Rate||% of VAT||Applicable to|
|Standard||20%||Most goods and services|
|Reduced rate||5%||Some goods and services (like children’s car seats and home energy)|
|Zero rate||0%||Some goods and services (like most food, children’s clothes, books, newspapers and airline tickets)|
List of UK VAT rates per sector:
|Type of business||2018/19 flat rate (%)|
|Accountancy or bookkeeping||14.5|
|Any other activity not listed elsewhere||12|
|Architect, civil and structural engineer or surveyor||14.5|
|Boarding or care of animals||12|
|Business services not listed elsewhere||12|
|Catering services including restaurants and takeaways||12.5|
|Computer and IT consultancy or data processing||14.5|
|Computer repair services||10.5|
|Entertainment or journalism||12.5|
|Estate agency or property management services||12|
|Farming or agriculture not listed elsewhere||6.5|
|Film, radio, television or video production||13|
|Forestry or fishing||10.5|
|General building or construction services||9.5|
|Hairdressing or other beauty treatment services||13|
|Hiring or renting goods||9.5|
|Hotel or accommodation||10.5|
|Investigation or security||12|
|Labour-only building or construction services||14.5|
|Laundry or dry-cleaning services||12|
|Lawyer or legal services||14.5|
|Library, archive, museum or other cultural activity||9.5|
|Limited cost trader (see above for definition)||16.5|
|Manufacturing fabricated metal products||10.5|
|Manufacturing not listed elsewhere||9.5|
|Manufacturing yarn, textiles or clothing||9|
|Mining or quarrying||10|
|Real estate activity not listed elsewhere||14|
|Repairing personal or household goods||10|
|Retailing food, confectionery, tobacco, newspapers or children’s clothing||4|
|Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Retailing not listed elsewhere||7.5|
|Retailing vehicles or fuel||6.5|
|Sport or recreation||8.5|
|Transport or storage, including couriers, freight, removals and taxis||10|
|Waste or scrap dealing||10.5|
|Wholesaling agricultural products||8|
|Wholesaling not listed elsewhere||8.5|
How do you pay UK VAT?
The easiest way to pay any VAT owed to HMRC is via their online VAT service. You’ll also be able to complete and submit your VAT returns here so it’s worth saving your info.
You can pay your VAT via:
- Direct Debit
- Online banking (Faster payments, Bacs, CHAPS transfers)
- Debit or commercial card
- In person at your bank or building society
- Standing order
Why is VAT good for small businesses?
Even if your company is not legally bound to pay VAT, you may decide to register as it makes your company appear larger than it is, which is a good option if you don’t want it to be too obvious that you are a small or new company.
- VAT Refunds
Did you know that you can actually make money via VAT refunds? I know it sounds too good to be true but hear me out – you can make money by charging your customers 20% VAT, but you then only have to pay HMRC a smaller percentage (based on the type of business you run). You then get to keep the difference – result!
- Reclaiming The Past
You can claim up to 4 years of previous VAT as long as you haven’t reached the upper threshold (£150,000). It’s worth doing as you’ll get some more back – but you will need to have all the correct records and invoices to prove the VAT paid.
Record keeping for VAT
By now you should be fully up to speed with your filing system, so this is really just another area of your business that you’ll need to plug in to your system. For VAT you must keep a record of all of the below for at least 6 years(!):
- Goods and services you buy or sell
- Copies of all sales invoices you issue
- All purchase invoices for items you buy
- All credit notes and debit notes you receive
- Copies of all credit notes and debit notes you issue
- Copies of self-billing agreements you make as a customer and name, address and VAT registration number of the supplier
- Records of any goods you give away or take from stock for your private use including rate and amount of VAT
- Records of any goods or services bought for which you cannot reclaim the VAT
- Any documents dealing with special VAT treatment
- Records of any goods you export
- Records of any taxable self-supplies you make – for example if you sell cars and you use one of your cars in stock for business purposes
- Any adjustments such as corrections to your accounts or amended VAT invoices
Further to this, if you are in construction you will have to keep another record which will support your Construction Industry Scheme Return. Every month you need to tell HMRC all the payments that you have made to subcontractors who are within the scheme. You’ll do this by submitting a monthly return. To be able to make this return you should make a log of:
- The gross amount of each payment you make to a subcontractor, excluding VAT
- The amount of any deduction you made from a payment before you gave it to the subcontractor
- If you made a deduction, the amount of any material costs, excluding VAT
VAT in practice:
- First find out the correct rate of VAT you need to charge – it’s not the same for all businesses. You will either be on a Standard Rate (20%), Reduced Rate (5%) or a Zero Rate (as the name suggests – 0%). It’s also worth noting that some goods or services are VAT exempt.
- When it comes to adding the tax to your invoices you should show the amount separately making sure to list the goods or services before VAT, the cost of VAT (the rate it is being charged at) and the total price owed.
- Keep an eye on the VAT rate which is liable to change. Any VAT changes will be announced during the Government’s annual Spring Statement.
Do you know about the different VAT Schemes?
Just to add a little more complexity to VAT, there are a few different schemes you can choose to follow. Each have their own benefits and pitfalls, but really they are there to make VAT work for your business. There’s the standard Value Added Tax that we’ve discussed above, but in addition to this there are three other VAT schemes which are there to simplify the process for smaller businesses. Here’s a deeper look in to what they are:
- Flat Rate Scheme
If you are turning over less than £150,000 a year then you can decide to pay your VAT under the Flat Rate Scheme. You should think about doing this because it cuts down on the amount of admit you’ll have to do – result! You won’t have to keep a record of the VAT you’ve charged on your invoices or what you paid. Instead, you’ll make payments as a percentage of your total VAT-inclusive turnover.
- Annual Accounting Scheme
If you opt to stay in the Standard VAT Scheme you will have to do a VAT return, pay VAT bills, or receive any refunds quarterly. To make this a little easier and reduce your paperwork you can join the Annual Accounting Scheme.
In this scheme you’ll pay either three quarterly or nine monthly payments and then you will complete just one return at the end of the year, where you will either receive a refund or have to pay the final balance. If your turnover will be less than £1.35m you can use this scheme.
- Cash Accounting Scheme
During standard VAT accounting, you pay HMRC the VAT that you charged on the sale of your goods or services, even if your customer has not paid you yet. Deciding to join the Cash Accounting Scheme means you will only pay the VAT you owe to HMRC once your client has actually paid you, but it also means that you can’t claim back any VAT before you’ve paid your suppliers.
- Limited Cost Trader
From April 2017 the Government requires ‘labour-only’ businesses (like contractors) to move from the Flat Rate Scheme over to this new 16.5% Limited Cost Trader Scheme. Under this new scheme some business will see a rise in their VAT costs, so it’s worth checking whether you should be paying VAT at all, it might be in your interest to deregister from VAT. Find out if you are a Limited Cost Trader here.
Online VAT Calculator (s)
When you complete your VAT return online you will be given a total sum of that you owe. It is possible to find out what you owe to HMRC before doing your return by using an online UK VAT calculator. An online VAT calculator will let you input your data and do the calculations for you, resulting in a figure that you can use as a benchmark for what you owe to HMRC. Remember that these numbers are only estimations and the only number that represents what you actually have to pay is the one given to you by HMRC after you have completed your VAT return. If you’d like to have an idea of what you owe to HMRC then feel free to check out these online UK VAT calculators:
How to Calculate UK VAT
Working out what you actually owe to the taxman can be a huge pain if you don’t know what you’re doing, but don’t worry, we got your back- just follow our guides below.
There are different methods of calculating exactly how much you have to pay to HMRC depending on the VAT scheme you are in. They’re based on your Input and Output values:
- An Output value is the VAT you charge.
- An Input value is the VAT other businesses charge you.
Here we’ll explain how you work out how much you have to pay depending on which method you are using.
How to Calculate your VAT for the Standard Method Scheme
Calculating the VAT you owe to HMRC is really just a case of going over your input and output invoices for the previous quarter. Your input invoice will show you how much VAT your suppliers have charged you. To work out your input VAT, add up all the VAT shown on invoices that you have paid your suppliers. Your output invoices will show how much VAT you have charged your customers. To work out your output VAT, add up all the VAT on invoices you have charged your clients.
Now you have two figures – your Output VAT and your Input VAT. The difference between the two is what you will pay to HMRC for that quarter.
Although this method is simple in its design, in practice it can become more complicated, especially if you have customers who are a little bit lax when it comes to paying on time, because you’ll still have to pay HMRC before you have been paid yourself, which can present a major cashflow issue.
How to calculate Cash Accounting VAT
This methods needs you to only work out your output VAT when customers have actually paid you, not on what is still due to be paid. The downside is that you can’t reclaim any input VAT until after you’ve paid your suppliers.
How to calculate Flat Rate Scheme VAT
The purpose of the VAT Flat Rate Scheme is to make work much simpler for small businesses, by reducing record keeping and saving time when it comes to finalizing your return.
To work out what you owe you have to add up all your sales, then multiply that figure by the flat rate percentage your business falls under. The number you get is what you owe HMRC.
You can’t reclaim any VAT, but the rate you pay will vary by business. This is because some businesses have to incur far larger costs, eg. farming vs consulting. The exception to reclaiming VAT comes if you spend more than £2000 (including VAT) in one transaction on a large piece of equipment needed for work.
To join the Flat Rate Scheme visit the VAT Flat Rate Scheme website here.
Good to know
- Speak to someone from HMRC via the VAT Helpline on 0845 010 9000 (lines are open 8 am to 8 pm Monday to Friday)
- Find out and fill out any forms needed via the HMRC VAT website
- View the different VAT rates
- Get more advice about how to pay VAT
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