VAT: Understanding The Basics
A lot of people view VAT to be complicated and full of technicalities and accounting jargon. If you have a business that is liable for VAT, you need to understand the basics of this taxation.
Once you know the basics, you will be able to better understand the impact it has on your business and why you need to register for this.
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What Is a Value Added Tax?
Before you can look further, you need to consider what a VAT is. A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain.
Simply put, when you are VAT registered, you will need to add 20% to the price of anything that you sell.
However, things become slightly more complicated when you consider that there are certain products which are zero-rated such as books, newspapers, food, and magazines.
There are other products as well, but it is simply important to know that there are some items that do not get the 20% VAT hike.
Do You Have To Register For VAT?
There are a lot of people who wonder if they have to register for VAT or if this is something voluntary that they can choose to ignore.
The facts are that if your turnover in the past 12 months has reached the VAT threshold for the year or you expect to reach it within the next 30 days, you will have to register for VAT.
The revenue service website will have more information about the requirements for VAT registration along with the forms that you need to complete.
It is important to note that the threshold for VAT usually changes and you need to check on a yearly basis.
Should You Register If Turnover Does Not Meet The Threshold?
Many people do not realize that registering for VAT even if your turnover does not meet the threshold for the year could be a good idea.
When you are registered for VAT and have a VAT number, your company will appear to be larger than it actually is.
Additionally, when you provide quotes for work, there are some companies that have a mandate which states that suppliers must be VAT registered.
On the other side, doing this could also make you less competitive. If you are not registered for VAT and sell a product for $100, that is all your customers are going to have to pay.
If you are registered for VAT, you will need to charge the 20% VAT and your customer will be paying $120 instead.
You could also soak up the difference and make a smaller profit on the product.
Can You Be VAT Registered And Not A Limited Company?
It is possible to register for VAT if you do not have a limited company. There are many businesses that feel VAT registration adds credibility to the company.
If you are a sole trader, you will need to look at how charging VAT will work as it is slightly different from limited companies.
How VAT Registration Affects Your Limited Company
The day that you register for VAT is the day that you need to start charging this fee on all of your goods and services. The current VAT can be found on the revenue service website but is currently at 20%.
After registering, there are some people who are confused about when the VAT should be charged. You need to start on the day of registration and not the day that you get your VAT certificate which will be later.
It can take around 30 days for the certificate to be provided and you should not wait to start charging VAT. While you are waiting for your certification to arrive, you need to adjust the invoice figures you provide to show the VAT you charge.
Once you have the certificate with your VAT number, you will be able to add this to your invoice and separate the sales and VAT amounts.
If necessary, you will need to resend the invoices to your customers as they will be able to reclaim the VAT that you have charged.
A VAT return will need to be submitted to revenue at the end of every quarter. This will need to show all of your output tax which is the sum of the VAT you have charged your customers.
You will also need to include all of the VAT you have incurred on purchases that your company has made such as equipment, supplies, and stock. This is known as the input tax.
One of the advantages and reasons to register for VAT is to reclaim the VAT your company is charged.
This is done via the quarterly return and will be provided as a VAT return. Once you have submitted the return, it will be reviewed and the difference will be payable to the government.