Your partnership:
VAT
When you start up your business you need to think about VAT (Value Added Tax).
Once your turnover reaches a certain level, you will need to register for VAT. You could decide to register voluntarily evern if you do not reach this level, and many businesses find this advantageous.
VAT is a tax on consumer expenditure. It is collected on business transactions and imports. The basic principle is that VAT is charged at each stage of the supply of standard or reduced rate goods and services (output tax). Where customers are registered for VAT and use the supplies for business purposes, they will receive credit for the VAT (input tax). The broad effect is that businesses are not affected and the VAT is actually borne by the final consumer.
The VAT system only applies to 'taxable persons'. Persons are taxable when they are (or should be) registered for VAT. It is the person, not the business, who is registered for VAT and each registration covers all the business activities of the registered person. The person to be registered can be, for example:
- a sole proprietor;
- a partnership;
- a limited company.
VAT is only applied where there is a supply of goods or services and so, for example, dividends are outside the scope of VAT. Only those supplies that are made within the UK are within the UK VAT system. There are detailed rules for determining whether a supply is made in the UK or not.
There are three rates of VAT:
- a standard rate, currently 17.5%, which applies to most supplies;
- a reduced rate, currently 5%. Reduced rate supplies include domestic fuel or power, installation of energy saving materials; renovation and alteration of dwellings and residential conversions; and
- a zero rate. Zero rated supplies include exports, most food, books, newspapers, public transport, drugs on prescription and children’s clothing.
Some supplies are exempt from VAT, which means that no tax is payable - but, equally, the person making the supply cannot normally recover any of the VAT on their own expenses. Exempt supplies include necessities such as insurance, postage, finance, education, and health
A business can recover the input VAT charged on its purchases only if it is registered for VAT.
- Should I be registered for VAT?
- Should I register for a VAT accounting scheme?
- VAT records
- Tax point
- Completing your first VAT return
- Can I reclaim all the VAT on my motor expenses?
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Where next?
Within Your partnership
- Setting up
- Accounting systems
- Payroll and PAYE
- National Insurance Contributions
- Income tax
- Exiting a partnership
Within Your profession...
- Your business structure
- Setting up
- Accounting systems
- Payroll and PAYE
- National Insurance Contributions
- Income tax
- Exiting a partnership
