Many of our clients that I work with find VAT really confusing; on top of this, you’ve also got different VAT rates. So, if you’re confused or don’t quite understand the different VAT rates, follow my video or read below, and I’ll explain more.
The Standard Rated VAT
The standard rate of VAT currently in the UK is 20%. But there are times in my working life where it’s been different. I remember times when it was 15%, and when I started my career, it was 17.5%. VAT doesn’t always stay the same rate; it can change, so ensure you are up to date with the current regulations.
VAT classifications
Some VAT rates have different classifications. So, it is also possible to charge null per cent, known as zero-rated VAT on services. Things that can be zero-rated are many foods and also children’s clothing.
But also, there are other things, like new build houses from scratch with zero-rated VAT attached to them. So again, ensure you understand your customers and your service classifications to ensure you’re charging the correct VAT rate.
Zero – Rated VAT
Zero-rated VAT is excellent because it allows you to charge null per cent of VAT on your income and reclaim VAT on all your costs.
So, if you are a construction company, you get to claim back all the VAT on your cost in big refunds, which helps your cash flow within your business and increases profit.
What are your classifications within your business, and are you making opportunities around zero-rated VAT?
Reduces Rate VAT
The reduced VAT rate is currently 5%; this can be for some energy costs, children’s products, but these vary.
The benefit of this is that 5% VAT is significantly lower than 20%. This allows you to charge less but reclaim all your costs with standard-rated VAT. Another classic for this in the construction industry is if there’s a conversion when you can charge 5% VAT and reclaim all VAT on your costs like materials, this can add up to a significant amount and increase the profitability of your job.
Are you completely aware of what your products or services are? So, you’re making sure that you are physically allowed to charge 5% VAT?
Exempt VAT
One thing that’s easy to get confused with is items that are exempt from VAT. Exempt means, in layman’s terms, they’re entirely separate. They’re not included in VAT, like outside on a different planet.
Exempt items can be financial services or insurance products; you cannot reclaim any costs if they’re classified separately. People often need clarification about zero-rated and exempt VAT; yes, you don’t charge VAT but remember, one has a 0% charge.
So, the one that is zero-rated will allow you to claim the VAT on your expenses, as I explained earlier, but if it’s exempt, you can’t claim it at all.
One thing that gets a bit gloopy sometimes is if you’ve got a business with exempt supplies and standard-rated supplies. This falls into a different classification, a partial exemption where you have to do a specific calculation to determine precisely what input VAT is VAT on your costs that you can physically claim.
So don’t get 0% VAT and exempt VAT mixed up because they are different.
You don’t have to know all these rules in your head; if I am working with a business I have not dealt with that industry for a while, I will physically go and find out what their products and services are and their classification for VAT.
Make sure you research your VAT classifications or have an advisor who knows what they’re doing. So, you don’t have problems that come later down a line that blows up, and you’ve got a low chance of risk, and if you got investigated by HMRC, you would say to him, “There you go, there’s a calculation, please feel free to check it”.
Keep up with the changes.
Sometimes there could be one-offs where there’ll be a separate VAT. Remember, the hospitality industry could charge 12.5% VAT during the pandemic. This doesn’t happen a lot, but it does happen.
So, make sure that you are keeping an eye on the tax affairs that are coming up to date, or you’ve got an excellent accountant that understands your business and informs you of any upcoming changes. This way, you’ve always got the finger on the pulse, so you know what is happening.
I hope this video helped. But if you’ve got any further questions feel free to get in touch; we can book a call, and I’ll take on board any questions you have, and I will do my best to help you.
