How VAT Works For Limited Companies

Value Added Tax, known as VAT, is a tax placed on goods and services at every stage of a product’s journey, but it is an indirect tax that must be calculated by the provider of the service. Limited companies charging VAT on goods and services can reclaim VAT from HMRC on purchases made for the business.

VAT registered businesses charge VAT, but also pay VAT, so they calculate the difference and either pay or recoup the excess from HMRC.

There is, however, a VAT registration threshold, and if you don’t meet that threshold, you don’t have to pay VAT. Only companies with a VAT taxable turnover of over £90,000, as of 01 April 2024, must register for VAT, but since it’s beneficial for companies to charge and recoup VAT, those with lower turnovers can also apply for VAT.

Those new to limited company structures, and sole-traders switching to a limited company structure, might find value added tax challenging to understand; but don’t worry, our handy guide today explains everything you need to know about how VAT works for a limited company.

How VAT Works: An Overview

What Is VAT?

Value Added Tax is a consumption tax levied on all goods and services. Although consumers pay the tax they often don’t realise that it’s included in the cost of their products in the UK.

This structure is different to the US, for example, who charge VAT separately from the price shown on the goods or service at the time. In the UK, VAT is a hidden tax, but it is still being charged and suppliers must offset the VAT they charge to customers with the VAT they must pay.

VAT Charges Explained

• Standard VAT in the UK is 20%, but reduced rates exist for some items.
• Some items have no VAT like postage stamps, financial and property transactions.
• VAT is charged on imported goods and services
• All current VAT tax rates are available here.

 

When Does My Business Need To Register?

In short, UK businesses with a turnover that exceeds £90,000 must register for VAT with HMRC and apply VAT to all goods and services. The VAT charged must then be reported to HMRC minus any VAT they have spent to buy goods and services for the business. They will then receive either a bill or a rebate based on whether they’ve paid more or less VAT than they’ve charged to their customers.

VAT Schemes & Programs

HMRC ensures that businesses are compliant with VAT by operating a VAT program to administer VAT. There are a variety of different schemes you can apply for, such as:

• VAT Flat Rate Scheme (for those with VAT taxable turnover of £150,000 or less)
• VAT Annual Accounting Scheme (for those with turnover of £1.35 million or less)
• VAT Cash Accounting Scheme (for those with turnover of £1.35 million or less)

 

Do You Pay VAT As A Limited Company?

Limited companies are subject to VAT obligations. In most countries, including the UK, consumer tax is levied on goods and services across the production process; this tax is paid by the consumer, and must be sent to HMRC by the company making the final sale.

As a limited company in the UK, the VAT tax rate is set at 20%, so all taxable sales of goods and services sold by a limited company should result in HMRC being paid 20% of the price.

Should Limited Companies Charge VAT?

Limited companies with over £90,000 turnover must register for VAT and pay 20% of their product sales to HMRC, but limited companies under £90,000 don’t need to register with HMRC and don’t charge VAT.

It’s worth noting that there are a few exceptions to the rule set out above, so if you’re unsure whether to charge VAT, it’s always best to contact HMRC to discuss your limited company and your unique tax obligations.

When Should I Register For VAT?

If you are a limited company with a turnover of £90,000 or more then you must register for VAT as soon as possible. If you have a turnover that’s less than £90,000 you can still register if your prefer.

How To Register For VAT

If you wish to register for VAT you will need a VAT number which you can acquire from HMRC or from your local chamber of commerce. Once registered, you must begin charging customers VAT by applying it to all your products and services; VAT must also appear on all of your customer and client invoices so they know what they’ve paid.

Additionally, HMRC demands that you submit a quarterly VAT return that shows your VAT balance and allows HMRC to calculate how much you must pay or receive as a rebate.

For instance, if you bought supplies for your business, the VAT charged on those items can be deducted from your VAT expenses. If that amounts to more than your expenses, you’ll receive a rebate. If it amounts to less, then you’ll owe HMRC the difference.

Can I Register For VAT Even If My Turnover Is Below The VAT Threshold?

While the threshold seems quite high, especially for small businesses, there are good reasons for it.

Firstly, it allows small businesses to grow, since they don’t have to charge VAT if they are beneath the threshold. Lower cost products can make them more competitive in the market and grow much faster.

But there is a catch, small businesses must still pay VAT on their expenses.

If a small business buys in their goods and services, such as in the retail sector, it starts to affect their profit margin. For this reason, many small businesses choose to charge VAT to customers even though they are under the threshold.

Claiming Back VAT

VAT is a hidden tax and unless it is stated on the receipt most customers don’t realise they are paying it. Due to the costs of goods and services, consumers generally pay 20% on top of the normal retail price.

However, VAT registered companies have a chance to claim back the VAT they have paid on goods and services, by offsetting the amount in their tax return. As long as you have evidence of it, such as an invoice.

Goods and services bought for your VAT registered business can be claimed back from HMRC, so for example, you can claim back the VAT for a company car, or for office supplies needed for the business.

While it’s advantageous to claim back VAT it can be a complex process; so if you have trouble reclaiming your VAT don’t be afraid to contact a professional accountant, especially if you are new to the process. Working with an accountant can help you learn the ropes and ensure everything is in order and correct.

VAT Recovery & VAT Returns

It’s important to note that working with VAT is an ongoing process and not a one time number. If you are VAT registered you will need to maintain accurate records of all sales and purchases, so that you have evidence of VAT paid on products when it comes to submitting your forms to HMRC on a quarterly basis.

VAT registered companies will need a VAT return that details the total value of purchases made during relevant periods, they will also need to submit the return on time. When HMRC receives the return a VAT refund can be issued for any company purchases; this can be a valuable saving for any size business.

VAT Reporting Deadlines

Naturally, HMRC has a set of deadlines for filing VAT returns, these are four times a year and are known as quarterly reports. The reports will show all the VAT paid on goods and services during that quarter, but the submission dates vary depending on the business type. Quarterly report deadlines tend to fall at the end of February, May, August, and November – but it’s always worth checking during the current tax year.

Limited companies registered for VAT must be aware of the deadlines in order to avoid penalties and charges. If you fail to submit a VAT report of the quarter or file one late, you can expect a penalty charge.

Keeping Accurate VAT Records

Needless to say record keeping is essential when it comes to VAT. This ensures that you pay the correct amount of VAT and have the right information at the right time of the year. Accurate records include invoices, financial reports, receipts, bank statements, and any other financial records relating to the sale or purchase of goods and services in the business. VAT records must be kept for a minimum of 6 years.

Tips For Keeping Accurate VAT Records

• All invoices and receipts for products and services must be kept and organised, you should have paper and electronic copies of your records; keep boxes of records separately for each year and scan digital copies.
• It’s helpful to have a separate bank account for VAT records to ensure you always have a transaction history for VAT and correct figures.
• Accounting software, or a professional accountant, can help you to keep track of your VAT sales and purchases, making it simpler to generate accurate records.

 

VAT quarterly reports are necessary if you are VAT registered so you want to make sure you have updated records that are easy to access for VAT submissions or any HMRC audits.

Using the tips above, you can ensure you have ready access to the documents and numbers at any time to avoid penalties.

How Is VAT Affected If Selling Goods & Services Abroad?

VAT means value added tax which is a tax on goods and services throughout the product journey. Countries around the world have value added tax which makes a difference when buying and selling items overseas. With international shipping the supply chain is bigger and it has more stages overall.

Below are 4 things to keep in mind when you’re planning to sell products internationally.

• If you want to recover VAT from the taxman you’re going to need a VAT number.
• Remember, VAT recovery is only possible from the country VAT was applied for.
• You might find that some customers aren’t liable for tax; the business may not be VAT registered, or else they don’t have a VAT registration number.
• No matter where you sell products, always keep accurate records of your VAT.

 

If understanding VAT in the UK seems complicated, wait until you encounter overseas VAT. It’s sure to be overwhelming for those unfamiliar with VAT, so make sure you discuss your business accounts with a professional if you have any doubts.

Government VAT Schemes

One helpful VAT scheme offered by the UK government is the VAT flat rate scheme that helps new businesses to grow by reducing the VAT they are charged on goods and services that support the business – imagine how much more competitive a business could be with far fewer overheads to pay.

There are plenty of benefits to small businesses thanks to a number of schemes that allow them to save money and reinvest their time in the business.

Accountants Can Help!

If you’re a small business that’s new to tax, the last thing you want is to be caught out by quarterly VAT reports – failing to submit them will lead to fines and penalties that could threaten your business. If you have doubts about your abilities to file VAT reports on time, the best advice is to hire an accountant.

This is a great reason to outsource your VAT accounts, but it’s not the only one. Partnering up with an accountant means you make the most of any available tax breaks while avoiding penalties and charges at the same time. Partnering with an accountant also helps you run the business much more efficiently.

Why not make sure all your tax records are neatly organised and accurate without the stress of writing them up yourself, thanks to a professional accountant? Lots of small businesses benefit from this option.

Final Thoughts

In this article we have covered a lot, including a definition of VAT, how different types of business operate, and some of the tax breaks you can find if you’re a small business starting out. Remember, VAT is vitally important for your business and can save you money on your overheads, when you get it right.

While VAT is optional for smaller businesses, lots of fledgling companies choose to sign up to VAT and bring down their overheads; but if your business brings in over £90,000 annually, you NEED to register for VAT by law. Don’t forget to make the most of VAT referral schemes such as the flat rate VAT scheme.

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