The basic principles of VAT

VAT (Value Added Tax) is a sales tax, levied on the expenditure of
consumer goods and services and business transactions, which is paid by
the consumer at the point of purchase and collected by Her Majesty’s
Revenue and Customs (HMRC). First introduced to the UK in 1973, it is
now a major source of revenue for the government.

There are four different categories for VAT: standard rate (17.5%) for
goods and services considered to be ‘luxury’ items, reduced rate (5%)
for goods and services considered to be socially or economically
important, zero rate for essential goods and services and exempt rate
for necessities. Some examples of zero-rated or exempt goods and
services are: children’s clothes, food, public transport, newspapers,
medicines, books, insurance, postal services and funerals.

For individual consumers, it’s a straightforward tax, paid at the point
of purchase. For businesses, though, it’s a pretty complex system.
However, put in simple terms, companies pay VAT on their purchases
(known as input tax) and charge VAT on their sales (known as output
tax).

All companies with an annual turnover of over £60,000 must be VAT
registered with HMRC, and must pay VAT on everything they buy and sell.
When your company is VAT registered, you must submit VAT returns to
HMRC on a quarterly basis to declare how much VAT you have charged your
customers and to recover VAT for goods or services you’ve purchased.
You’ll also need to set up a system of VAT invoicing for your sales,
and all paperwork relating to VAT must be retained for VAT inspection,
as HMRC carries out periodic VAT audits on all VAT registered companies.

You may wonder why some goods and services are zero-rated and some are
exempt – what’s the difference? The answer is that a company can’t
claim back the VAT on its purchases if that company sells only goods
and services that are exempt.

Otherwise, many business to business transactions (in registered,
taxable companies) on goods and services purchased in order to make
further goods or services which are then sold on (directly or
indirectly) to consumers are exempt and the VAT can be reclaimed – as
the VAT is paid by the consumer at the end of the line. Input VAT from
goods or services that your company has purchased can be recovered
through your quarterly VAT returns. You’ll need to keep the VAT
invoices you were issued in order to do this.

VAT invoices have to conform to certain requirements and copies of them
must be kept for at least six years. These include:

Article Source: http://www.a1-articledirectory.com

Biography: Author: Benedict Rohan Website: www.mortgagenation.co.uk Benedict Rohan works as a freelance finance writer. Commercial Mortgage, Homeowner Loans, Remortgages

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