When it comes to retail taxation, there is one aspect of taxes that is above all the others. That is VAT, and it is crucial that you understand how it works so that you can make the most out of your business finances. Here is a quick look at how retailers need to account for VAT in the UK.
VAT stands for value added tax and it is a tax applied to most goods and services that registered UK businesses provide here in the UK. It also covers some of the supply of goods and services abroad as well. Furthermore, the EU has its own new system that makes it easy to pay VAT across European member state countries.
VAT is paid whenever the registered business sells its goods or services to another business or a non-business entity, such as private individuals. VAT registration is compulsory for businesses that fall under either or both of these categories:
There are certain goods and services that are exempt from VAT. These often don’t include retail services. Therefore, you will most likely need to register your business for VAT and charge it as part of your sales.
In addition, it is possible to register for VAT even if your turnover isn’t above the threshold limit. The reason why a business might choose to register is the opportunity to claim back the VAT it paid for any purchases it made.
In a retailer’s perspective, it is highly beneficial to register for VAT if your customers are mostly other VAT-registered businesses. On the other hand, if your retail business only deals with the public, who aren’t VAT-registered, then the VAT would just create an additional cost to the public. This is turn might harm your competitiveness.
There are three VAT rates applied in the UK. These are the standard rate (20%), the reduced rate (5%), and the zero rate (0%). The standard rate went up January 2011 and there is an informative article about its effects on the retail industry at Retail Think Tank.
If you are selling most of your goods and services to the public, it is important to know that there are special VAT retail schemes available. These are to make accounting for VAT a simpler and smoother process.
Under the normal VAT system, you will have to record the VAT on each sale you make. To simplify this, the VAT retail schemes allow you to work out the value of your total VAT sales. This will be done on a specific period and it will include the proportions of the different VAT rates. The main retail schemes include:
You can select the appropriate schemes for your business, but you need to keep in mind that your turnover might affect which scheme you are able to use.
Overall, the majority of retailing businesses must include VAT as part of their sales. The good news is, that certain schemes make the management a little bit simpler. If you want to find out more about VAT, then check out our other VAT resources. There are plenty of helpful articles there to guide you through the taxation processes.