Today I’d like to talk to you about how VAT works and give you an idea of what it means to the bottom line in your business.
VAT stands for value added tax, it was introduced in nineteen seventy-three and it’s the third largest source of revenue for the government after income tax and national insurance.
So the standard rate of VAT in the UK is twenty percent however there are various exceptions like children’s clothing that are taxed at zero percent or utilities at five percent.
This means that if you charge a customer a hundred pounds you would then have to add twenty to make the total they pay one hundred and twenty.
However if your customers are price sensitive and won’t pay VAT then you would have to charge one hundred pounds and then hand over one sixth of that to HMRC which wouldn’t be good for your margins.
The good news is that as well as handing some of your sales over to HMRC you can also have money handed back to you for business related purchases you paid VAT on.
So unlike the sales taxes of many other European countries, we have an eighty-two thousand pound threshold before registration is compulsory.
For many new businesses selling to consumers, this levels the playing field as they don’t have to charge VAT while their larger competitors do.
Please keep an eye out for future blogs where I’ll be discussing how small business owners can use VAT registration to their advantage and some of the common traps for new businesses.
Northants Accounting are a firm of accountants based in Northampton, if you would like to discuss anything we have covered in this blog then please get in touch and we’d be happy to help.