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Value Added Tax is a government tax on goods and services, and it's based on the increase in value of a product or service at each stage of production and distribution.
It was initially brought in during Edward Heath's prime ministership in 1973, as part of the UK's condition of joining what was then the European Economic Community, and it started off as a simple 10% tax on nearly all goods bought from a business. It replaced the Purchase Tax, which was a complicated system with numerous different rates within it, and is administered by HMRC. VAT is the third largest source of government revenue after income tax and National Insurance, and it generated £125.3 billion in 2017/2018.
All businesses that provide taxable goods and services must register for VAT if their turnover is more than £85,000, although if they have a lower turnover they can still register.
Registered businesses must pay HMRC the VAT they have charged, but they may offset this with the VAT they have incurred on goods or services they have purchased.
HMRC's Flat Rate Scheme allows a VAT registered business with a turnover of less than £150,000 per annum to pay a fixed percentage of its turnover to HMRC every three months. The scheme is intended to help small businesses by reducing the paperwork and allowing new companies to keep some of the VAT they charge their customers.
The standard rate of VAT in the UK is currently 20%, but contrary to popular belief there are also reduced rates which are charged at 5%. Other items are zero-rated and some are completely exempt. It's a complicated system – take a look:
1. The following items are among those charged at the standard rate:
2. The following items are among those charged at the 5% reduced rate:
3. These items are zero-rated:
4. These items are among those which are exempt:
If you run a small business, VAT compliance can seem like a daunting task. Here at AMR Bookkeeping Solutions we can help keep track of your payments, expenses, receipts, income and outgoings, give reliable financial advice and guidance and help with online submission of VAT returns. We ensure your books are in the best possible order to be passed over to your accountant for the presentation of your annual accounts. Why not get in touch and let us help with your VAT issues.