Value Added Tax or "VAT" can be a headache for businesses of all sizes. It is a system whereby companies that are registered for VAT essentially act as tax collectors on behalf of the government. During the course of a year, a business will charge their customers VAT and at the same time be paying VAT to its own suppliers.
What the company pays in VAT is deducted from the total received, with the difference being paid to or received from the UK government (depending on whether the balance is positive or negative). It is a straightforward concept that all too often causes problems for companies. Fortunately, Coddan are here to help!
Companies and LLPs are eligible to pay VAT: VAT is compulsory for a company or limited liability partnership (LLP) that has a VAT taxable turnover of more than £81,000 per annum. This threshold is subject to change from time to time, and you should speak to Coddan or check the UK Government website for latest information. Regardless of the size of a company or LLP's VAT taxable turnover, it is possible for any corporate entity to volunteer for VAT registration.
Input tax and output tax: these are two basic phrases used to describe the VAT accounting process. Input tax is the VAT that a company has paid to suppliers. Output tax is the VAT that a company has charged and received from its own customers.
Not all Input tax can be reclaimed: you must carefully read the government guidance on exactly what Input tax can be reclaimed. Currently, tax cannot be reclaimed for supplies that were bought for private use, supplies bought for use by another company, or VAT paid on non-recoverable items such as entertainment costs (unless used solely for business purposes).
Record keeping is essential: it is vital that a company or LLP maintains an accurate and up-to-date set of VAT accounts. Failure to do so makes the task of complying with UK Tax law extremely difficult. The amount spent and the reason for the expense - personal, business, entertainment - should be recorded. Some expenses, like a phone bill, might be a mixture of more than one class of use.