This serialised guide will give you a basic introduction to the key principles and debunk any preconceived misconceptions.
The Different VAT Rates
Value Added Tax (VAT) is a tax system controlled by HMRC. Most of your purchases will have a VAT charge added. This means VAT is applied to most business transactions. There are three rates of VAT in the UK:
- The standard rate is 20%.
- The reduced rate is 5%.
- The zero rate is, unsurprisingly, 0%.
VAT Jargon: Inputs and Outputs
- Businesses charge VAT on sales. This is called ‘output VAT’.
- VAT will be payable on most goods and services purchased by the business. This is called ‘input VAT’.
Here’s simple example:
- You buy a laptop for £1,000 + VAT of £200.
- This means in total you will pay for the laptop is £1,200.
- In this example, the input VAT is £200.
- This means HMRC owe you the £200.
- However, you use the laptop to design a website and charge the customer £5,000 + VAT of £1,000. That will be a total of £6,000 for the job.
- The output VAT is £1,000.
- This means you owe HMRC the £1,000.
- £1,000 (Your output VAT) minus £200 (Your input VAT) means that you will need to pay HMRC a total of £800 in your next quarterly VAT payment.
If your input tax is greater than your output tax, HMRC will owe you a refund.
So, we’ve started slow. VAT is a complicated issue and we don’t want to get ahead of ourselves. Next time, in Part 2, we’ll be looking at when and how you register for VAT.