VAT Tax Guide
Value Added Tax is a consumption tax on goods and services in the United Kingdom. If you are a business that sells taxable goods and services, you may need to register for VAT. When you register for VAT, you'll collect VAT at the point of sale and forward the taxes to the government.
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Definition of VAT
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VAT is collected at every stage of production and distribution of a product or service. Nearly every item sold in the United Kingdom is subject to one of three VAT levels. As of January 2011, the standard rate of 20 percent applies to most goods and services, the reduced rate of 5 percent applies to certain goods such as child safety seats, and the zero rate applies to a limited number of services and goods such as charity stores selling donated items.
When to Register
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Your business is required to register for VAT if you have sold £70,000 or more in taxable goods and services during the last 12 months, or if you expect to sell more than £70,000 of taxable goods and services within the next 30 days. The threshold applies to the turnover -- the amount of money brought into your business -- and not your business's profit. You are not required to register for VAT if you sell goods and services that are not subject to VAT.
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How VAT Works
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When you are registered for VAT, you will keep a record of all purchases that you make and pay VAT on. This is called input tax. You'll also keep a record of all sales you have made to customers and other businesses and collect the VAT due on those items. This is called output tax. When it comes to reporting your VAT to the governing authority, Her Majesty's Revenue and Customs, you deduct the input tax from the output tax to get the total amount due.
How to Register for VAT
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Which forms you need to register for VAT depends upon your business type. HMRC provides an online application to register for VAT. Most businesses can register for VAT with one form, but there are exceptions. Partnerships and groups of companies will require multiple forms. The online process will walk you through registering for VAT. You should get your registration in the mail within a month. While you are waiting for your number, you should start to collect VAT.
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