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What is VAT? And How it Works in UK?

VAT Return is abbreviated for value-added tax. which is a kind of tax that is going to be added to the value of your product or service.

what does it mean?

If I want to explain about VAT or to say that VAT Return is a kind of tax which you as a business holder need to collect from your customers and paid directly to HMRC.VAT Return is charged in form of a certain percentage of the selling price of a product or service, which at the moment is 20%.

We have different type of VAT rates which applies different products.

1: Zero rate ex: Books, Children clothing:

This means that you have to charge zero percent on certain products’ selling prices. such as books or children’s clothing.

2: 5 percent ex: Electricity:

Which applies to limited services and products. As an example, electricity.

20 percent (standard rate) ex: Most of the Products &Services Cars, Mobiles, cleaning services…

It applies to most products and services. For example, I can say cars, mobile and cleaning services.

3: Exempt ex: Insurance, Education

There are some services mostly services are products that are exempt from VAT. So, they don’t need to charge VAT to their customers. As an example, insurance services or education services.

How VAT works?

  1. When register for VAT?

If you think that your company turnover will be eighty-one thousand pounds or more in the next twelve months. You have to register your company for VAT.

2: How to charge VAT Return after registering?

Basically, after registering for VAT, you need to charge twenty percent of the selling price to the product or service.

I will explain to you with an example when you register for really you have to charge 20% of that five thousand pounds and added to the five thousand pounds.

So, twenty percent of five thousand pounds would be one thousand. Plus, the selling price of five thousand would be six thousand pounds. So, the savings price is six thousand pounds.

So, in this example, you need to pay 1,000 pounds of v80 to HMRC, which you collected from your customers on behalf of HM Revenue & Customs.

When to submit VAT Return to HMRC?

Normally VAT needs to be submitted to HMRC every three months. From the date that your company has been registered for VAT. For example, if you register your company for v80 from 1st of January 2016 your first quarter would be from fares on 1st of January to set the 1st of March 2016.

How much to pay HMRC?

I will explain to you with an example that How to charge VAT? on sale and How to claim by created on your purchases and expenses? Imagine that for the quarter ended 31st of May 2016 your company turnover was a hundred thousand pounds plus VAT of twenty thousand.

So, the hundred thousand pounds would be the net sale. Twenty thousand pounds would be deviating, which is 20 percent of $100,000. The hundred and twenty thousand pounds would be the gross rate, that is the final figure that you have to charge your customer.

For example:

Prior selling price: $5000

Selling price after being Registered for VAT:

$6000

$5000+($5000 multiply 20%) =6000

Normally VAT needs to submit to HMRC every three months from the date that your company has been registered for VAT. As an example, if you register your company for v80 from 1st of January 2016, your first quarter would be from fares on 1st of January to set on the 1st of March 2016.

Example:

Company turnover for the quarter ended 31.05.2016 was $100000 plus VAT of $20000.

So:

$100000      Net sale

$20000         VAT

$120000       Gross Sale

Company Purchase for the same quarter: $40000

Plus, VAT of $8000 and Expenses of $20000

Plus, VAT of $4000.

So:

$40000      Net Purchase

$8000        VAT

$48000      Gross Purchase

$20000      Net Expenses

$4000        Gross Expenses

VAT on sale- VAT on Purchase & Expenses= VAT to be Paid to HMRC

$20000 – ($8000+$4000) = $8000

So, the VAT to be paid to HMRC would be $8000 in this quarter

 

 

Different type of VAT schemes:

  1. Standard Rate
  2. Flat Rate
  3. Annual Accounting
  4. Cash Accounting
  5. Margin Scheme
  6. Retail scheme

Who needs to register for VAT?

  • Self Employed People
  • Limited Companies

What to do after registering for VAT?

  • Charge 20 percent on top of the selling price of your product or service
  • Prepare your paperwork’s for your accountant
  • Submit VAT Returns HMRC and pay for your VAT
  • Repeat this process every 3 months Read More

 

 

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