When you run a business, it is highly likely that you will pay VAT on many of the goods and services that you use and purchase. This additional charge of 20% can add a significant cost to your business. 

VAT is paid by the consumer which includes businesses but you might be able to reclaim any VAT that you pay but how is that possible?

Reclaiming VAT – Who Can Do It?

In order to reclaim VAT, your business has to be VAT registered. You can do this voluntarily if your earnings are under £85,000 but if you turnover more than £85,000 you have to be VAT registered. Some businesses are exempt from VAT and this can include businesses that handle antiques, educational training or insurance.

Zero Rated Goods and Services

There is a difference between VAT exemption and zero-rated goods and services. The difference here is that there is a VAT charge of 0% for goods and services and this can include those businesses that operate in publishing, food, health and children’s clothing.

For certain businesses, this can work well for them. While you might sell goods or services that are zero-rated, whereby customers are charged 0% VAT, it is highly likely that you will have costs that are not zero-rated. This can include the likes of IT equipment or fuel. What this means is that these businesses spend more on VAT with suppliers than they collect from customers. As a result, the difference can then be reclaimed from HMRC. Providing your business is VAT registered, you can file a claim to retrieve VAT on the majority of costs.

So How Does it Work?

As a VAT-registered business, you will need to charge the correct VAT rate on goods and services that you provide. Any invoices will need to clearly state the amount of VAT that they are being charged. Furthermore, it is important that you retain any invoices that you receive for any purchases that you make. Then, when it comes to VAT returns, you will be able to reclaim the difference between the VAT that your customers pay to you and the VAT that you pay.

Essentially, if you pay out more VAT than the amount of VAT you charge then you can reclaim the difference. If you pay less VAT than the amount of VAT you collect from customers, you will need to pay the difference.

The majority of businesses will do this every three months although there are different VAT accounting schemes. However, from April 2022, any business that becomes VAT registered has to ensure that they comply with Making Tax Digital legislation which means that all VAT returns have to be submitted online.

VAT might seem complex and it is something that you will have to manage as a business once you become VAT registered. As a result, you might find that you benefit from using accounting services to help you overcome the challenges that you might face, enabling you to focus on running your business.