Glossary

VAT

This is a very quick overview of VAT. It is in no way intended to be a comprehensive guide.

VAT is a very complex subject and it is suggest that you read the various vat guides relevant to your business.

Overview

VAT is a tax charged on most transactions in the UK.

When your business reaches a certain threshold then it will have to register for VAT.

This means from the date of registration you:

must charge vat on all your relevant sales
you can reclaim vat where you have been charged it on your purchases

Basically you become an unpaid tax collector for HMRC as you pay to HMRC the VAT that you have charged on your goods or services less the VAT you have paid on your purchases.

The issue at the point of registration is can you pass the VAT onto your customers?

If your customers are vat registered then this is simply a matter of informing them that you are now vat registered, adding the vat to their sales and of course showing this on their invoice. Your customer will be able to claim the vat back so the net effect of this is nil.

If your customers are not vat registered then they will not be able to claim the vat back and the vat has to be absorbed either by them through a price increase or by you through a reduction in your profit.

The vat will also need to be shown on the invoice but as they cannot claim it back effectively they have to pay the increased price.

This could mean that your price is no longer competitive in the market and you may have to absorb some / all of the VAT into your profit margin.