How does VAT work within my small business when I first start up?
30 November 2008
VAT is the Value Added Tax which is added to goods and services as a means of a consumption levy on value being added to a chain. This is a tax charged at each stage between the producer and the consumer of a good or service, so in effect, the charge flows downstream.As of December 1, 2008 the cost of the VAT will go down to 15 per cent and back up again to 17.5 per cent January 1, 2010. There are a few items that carry a lesser charge like some fuels. Other things like food, periodicals, clothes for kids and some medically based items carry no charge at all.A business making less than £67,000 annually does not have to register for the VAT 9 digit number. This is nice for the new business on the block, making the cost of goods or services provided significantly less than a VAT registered competitor. If you do startup a business and register for your VAT number you first have to evaluate what it is you are selling and see where it falls in the VAT cost breakdown. As we discussed before some items carry a lesser charge, some no charge at all.
Charging your customers using the VAT system is easy. Take the net price of what you are charging, whether a service or good, and multiply it by the VAT rate for that service or good. Take that and add it back to the net price giving the consumer the gross price they are to pay.Do you need to show the charge? If you are selling goods, for most companies they just build the VAT cost into the goods sold. For services provided however, like a hired out plumber, they would have to itemize the receipt showing a cost breakdown of their charges. They would have to be sure that the VAT is shown on a separate line item. When a startup pays their own bills, like for utilities, they should not expect to find a separate line item for the VAT. But when paying a contract such as a carpenter or cleaning service, they should breakdown the cost of the VAT on your receipt. These VAT registered business must also show their 9 digit VAT number at the bottom of all receipts. If you feel you are being charged VAT that you should not, you can call the HRMC National Advice Service on 0845 010 9000 or check online at http://ec.europa.eu/taxation_customs/vies/vieshome.do?selectedLanguage=EN .
You may also register an official yet confidential complaint by calling Customs Confidential hotline at 0800 595 000.Startups it seems will have a solid time of not having to charge a VAT. This will be good initially to get the business going and help that startup to be more competitive. Once you have passed that minimum annual limit, register immediately, you do not want to be fined for failing to comply with the VAT regulations.
