Value Added Tax (VAT) and how it works
There are 2 elements to VAT:
- Output VAT, or output tax, is the tax you charge on what's going out of the company ie what you're selling
- Input VAT, or input tax, is the tax you pay on goods and services that you buy in to run your business eg raw materials or stock
If you're registered for VAT the cost to your business is ultimately neutral because if your business receives more output tax from sales than it pays input tax on purchases you simply pay the difference to HMRC. This is almost always the case, however if you pay more input tax than you have charged in output you can claim VAT back from HMRC.
The benefit of being VAT registered is that you can claim back some or all of the VAT you pay on the goods or services you use for your business.
The standard VAT rate is 20% although there ar many other rates, including a low rate and a nil rate. If you supply goods or services that are zero rated you'll still need to register for VAT and then apply for an exemption. More information on the different VAT rates that apply to different goods and services
is available from the HMRC website.
If you're not VAT registered you must not add VAT to any of your invoices.