From Monday 15 May 2023, unless you are…
*Just a quick disclaimer before I begin. This information is very basic. To be able to make it easy to understand, I’m not going to go into every possible scenario. That’s your accountant’s job. I’m just going to give you a very basic overview of the most common scenarios for the average Joe.
What is VAT (Value Added Tax)?
VAT is just another tax. When you buy something or pay for a service, chances are very good VAT is included in the price. There are some exceptions, but like I said earlier, that’s outside the scope of this document. So, let’s say for example you buy a laptop and you pay £500 for it. VAT is already included in the price.
If you did not have to pay VAT on the laptop, it would only have cost you £416.67. The same goes for most services you pay for. For instance, you get quoted for that loft conversion you’ve been planning. The builder is VAT registered, so he has to charge VAT by law. He quotes you £25 000. The actual price for the loft conversion is only £20 833.33. The rest is VAT and the builder will have to pay this over to the HMRC when he does his VAT return.
How do you calculate VAT?
It depends what amount you have in front of you. If you have the inclusive amount (the total price with the VAT already included), and you’re looking for the exclusive amount (amount excluding VAT like in the examples above), the formula is:
Exclusive Amount = Inclusive amount / (1+ (VAT Rate/100)
If you have the inclusive amount and you want to calculate the VAT part, the formula is:
VAT = Inclusive amount – (Inclusive amount / (VAT Rate/100))
If you have the exclusive amount and you want to calculate the VAT that needs to be added to this amount, the formula is:
VAT = Exclusive Amount * (Vat Rate/100))
And lastly, if you have the exclusive amount and you want the total inclusive amount after VAT was added, the formula is:
Inclusive amount = Exclusive amount * (1 + (VAT Rate/100))
The current VAT rate in the UK is 20%.
VAT Registration and VAT Thresholds
So why do some companies charge VAT and others not? Let’s look at our loft conversion example again. You get two quotes, one from Builder A and another from Handyman B. Builder A has VAT included in his quote, but Handyman B does not. Why is this?
You only have to legally register for VAT in the UK when your VAT taxable turnover exceeds £83 000 in a year. You can still register for VAT if you want to, but you do not have to. Handyman B did not turn over more than £83 000, so he’s not VAT registered. Builder A however did turn over more than £83 000 so he had to register for VAT. The result is that Builder A’s quote amount is handicapped by a 20% VAT increase.
But it’s not all bad news for Builder A. He will be able to claim back the VAT he paid on the building materials he purchased, so the cost of his purchases will be 20% lower than that of Handyman B.
To summarise the VAT thresholds:
You have to register for VAT in the UK when your company’s VAT taxable turnover exceeds £83 000 in a year. You can voluntarily register for VAT no matter what your turnover.
You can join the Flat Rate VAT scheme if your company’s tax exclusive, annual taxable turnover is not more than £150 000. And if you are Flat Rate VAT registered you must leave the Flat Rate Scheme if the total value of your company’s tax inclusive supplies in the year (excluding sales of capital assets) is more than £225 000.
In the second part of this article I’m going to explain the UK’s Flat Rate VAT scheme. I’ll look at how the scheme works and do some basic comparisons between normal VAT registration and Flat Rate VAT registration.