 |
What is VAT (Value added tax)?
Value Added Tax, or VAT, is a tax that applies to most business transactions involving the transfer of goods or services.
Once your business turnover reaches a certain level, you will have to register for VAT. This means that whenever you buy or sell anything in the course of your business, you will have to pay VAT to HM Revenue & Customs (HMRC).
Even if your turnover is below the registration threshold you could consider registering voluntarily for VAT.
How does it work?
Put simply, a business will pay VAT on its purchases, which is called input tax, and charge VAT on its sales, which is called output tax
If a VAT-registered business receives more output tax from sales than it pays in input tax on purchases, it must pay the difference to HM Revenue & Customs (HMRC). If more input tax has been paid than output tax charged, HMRC will refund the difference to the business.
Sales and purchases
If you register for VAT, there are some changes you will need to make in the day-to-day running of your business.
For your sales:
- Starting from your date of VAT registration you will need to issue VAT invoices.
- You will need to keep a record of the amount of VAT you charge in your records. This is your output tax.
For your purchases:
- You must have a VAT invoice for all your purchases to be able to reclaim any VAT paid. See our example of a completed VAT invoice.
- You will need to keep a record of the amount of VAT you have paid in a separate column in your records. This is your input tax.
Before you get your invoices printed, it's a good idea to check that they contain all the necessary VAT information.
Business expenses
Your business expenses will fall into one of two categories for the purposes of self-assessment - allowable and non-allowable expenses.
Broadly speaking, you can deduct from your turnover all the costs you incur for the sole purpose of earning business profits. These are known as allowable expenses.
The following gives some examples of the types of cost which are allowable as legitimate types of business expense:
- goods purchased for resale
- materials used by the business to make goods to sell
- rental of business premises
- electricity for heating, lighting and manufacture
- cleaning
Corporation tax
If your company is liable to pay corporation tax on your profits, there are several things you must do:
- Tell HM Revenue & Customs (HMRC) that your company exists and that it is liable for tax. To do this you can complete form CT41G at the HMRC website (PDF) or contact your local HMRC office. Find your local office on the HMRC website.
- File a self-assessment Company Tax Return for your company, on which you calculate your own corporation tax liability and pay it without prior assessment by HMRC.
- Keep records of all company expenditure and income in order to work out your tax liability accurately.
If you don't let HMRC know that you are liable for corporation tax, file your Company Tax Return incorrectly, or pay your corporation tax late, you may incur a financial penalty. To avoid penalties and interest charges you should know your:
- statutory filing date - the date by which your company tax return must be received by HMRC
- normal due date - the date by which you must pay your corporation tax
|
|
|
