VAT calculator

What is VAT

In simple terms, it is a sales tax on goods and services. As a UK business, when you sell something, you charge VAT and when you buy something, you reclaim VAT. The difference between the two is paid to HMRC (although sometimes, you might get a refund). You don't need a VAT calculator to understand how VAT works so here is a small example: You sell a door for £2,400 and bought it for £1,200. Your output VAT (amount you must pay HMRC) is £400 and your input VAT (the amount you can reclaim from HMRC) is £200 . The difference of £200 is paid to HMRC. Simple right?

How much is VAT

20% - Most businesses pay VAT at 20% , this is known as the standard rate of VAT.
5% - The reduced rate of VAT is 5%. For example, businesses that supply energy-saving materials, mobility aids for the elderly, smoking cessation products (nicotine patches) and domestic power, to name a few.
0% - Known as zero rated supplies. Examples of zero-rated businesses include charity shops - selling donated clothes, Equipment for disabled people, Sanitary protection products to name a few.
Exempt - this is like the zero rated, but the key difference is that these businesses cannot recover any input VAT. Insurance and money lending are typical examples. Contact us to discuss what rate of VAT your business should be paying.

What can I claim VAT back on

Different types of businesses charge VAT at different rates and this means when you are buying goods and/or services, you reclaim at the rate and amount shown on the invoice. You may find that you cannot reclaim VAT on some of your largest expenses such as rent and insurance premiums. You need to look at the purchase invoice to work out what can you claim vat back on. You can only claim the amount of VAT as described on the invoice.

In addition, you can only recover input VAT in the furtherance of your business, that is, on expenses for a business purpose. An example of expenditure not for business would be personal expenditure or entertainment. So, for example, if you are taking out clients for a meal, you cannot reclaim the input VAT on this. Or, if you purchase a TV for your home, this is non-business related and input VAT cannot be claimed. There are several tax traps to be aware of so contact us for a free non-obligation chat.

What is the VAT threshold

£85,000. If your turnover in a 12-month period is below £85,000, you don't need to register for VAT. This means you can sell goods and services without charging VAT but equally you cannot reclaim VAT when you purchase goods or services.

Are there any other options for a small business

Yes. If your turnover is less then £150k you can apply to pay VAT using the flat rate scheme. This allows you to use a single rate of output vat, so you don't need to go through all your paperwork to work out the exact amount of VAT you must pay. For example, the flat rate scheme for Advertising is 11%. This means each quarter; you look at your total VAT inclusive sales and multiply this amount by 11% and pay this over to HMRC. You cannot reclaim input VAT on your purchases unless you purchase capital assets over £2k. Contact us to see if this option is right for you.

Option of cash accounting for a small business

The traditional method of calculating VAT is using invoices. That is, you pay output VAT and reclaim input VAT regardless of any money going through your bank. What is the problem with this? If you don't get paid immediately or there is a delay in receiving cash, you will have to find the cash to pay HMRC. Clearly, this is a significant cash flow issue to a business. For this reason, small businesses can use the "cash accounting" VAT method. If your estimated VAT taxable turnover is £1.35 million or less in the next 12 months, you can use this scheme. As always, contact us to discuss your circumstances because there are some exceptions namely:

  • you're not up to date with your VAT Returns or payments
  • you've committed a VAT offence in the last 12 months, for example VAT evasion
  • where the payment terms of a VAT invoice are 6 months or more
  • where a VAT invoice is raised in advance
  • buying or selling goods using lease purchase, hire purchase, conditional sale or credit sale
  • importing goods into Northern Ireland from the EU
  • moving goods outside a customs warehouse

How to calculate VAT

You need to calculate your VAT position on a 3-month basis. This is best done using accounting software such as Sage or Xero. These software packages allow you to seamlessly send and receive invoices and have inbuilt ability to calculate your VAT position.
You will also be able to send an invoice to your customers. This will break down your sales income and output VAT. In addition, this acts as proof to HMRC, and your customer will use this invoice to reclaim input VAT. You also use the software to capture details of purchase invoices. It is imperative to input data into the system that matches the invoice (you cannot claim input VAT on pro-forma invoices). Once you have entered this information, you select your VAT period, and the software will calculate your VAT position and prepare the relevant tax form. Once you're happy, you can submit your VAT return to HMRC using the accounting software.

When is VAT due

For most small businesses, VAT must be calculated every 3 months and reported 1 month and 7 days after the period end. So, for example, if your VAT quarter end is 31 March 2021, you will need to submit your VAT return by 7 May 2021. The payment must be made on the same day i.e., 7 May 2021 unless you have a direct debit in place in which case the payment will be deducted on 12 May 2021.

It is good practise to align the accounting year end to the VAT quarter end.

How to pay VAT

The simplest way is to set up a direct debit and 12 days after the VAT return due date, the money is debited from your account. By way of an example, If you VAT return quarter end is 31 March, you need to submit the VAT return by 7 May. The payment is taken out on or around the 12th.

What are the VAT record keeping requirements

You can keep VAT records on paper, electronically or as part of a software program (such as book-keeping software). Records must be accurate, complete and readable.You must keep VAT records for at least 6 years. If you've lost a VAT invoice or it is damaged and no longer readable, ask the supplier for a duplicate (marked 'duplicate'). HMRC can visit your business to inspect your record keeping and charge you a penalty if your records are not in order.

I made a mistake on a previous VAT return

You can simply make a correction on your next VAT return If:

  • the error is less then £10k, or
  • 1% of your box 6 figure (up to a maximum of £50,000).

If the error is larger then it must be reported to HMRC on form VAT652 or you can contact the VAT error team directly. Contact us for VAT advice if you have an issue before contacting HMRC.

HMRC have sent a VAT notice of assessment of tax

This happens if you do not submit a VAT return to HMRC and don't pay on time. The best thing to do is bring your VAT affairs up to date by submitting a VAT return and making the payments. Any surcharges/penalties arising can then be appealed and if there is a reasonable excuse, they be reduced to NIL. Contact us to discuss your personal situation.

What does inc VAT mean

This means the goods/services will be suppiled with VAT already included. The alternative is when some says their goods/services are + vat. This means VAT of 20% will be added to the price.

How to check if a company is VAT registered

How we can help you

We are experts in small business VAT and have years of experience helping clients out of trouble and keeping compliant. We use the latest technology, keep up to date with VAT changes and case law and can take care of your entire VAT burden. We will ensure you never miss a deadline and will keep your records digitally so that an HMRC investigation will run smoothly. We offer a complete package for small businesses and this includes subscription to Sage cloud software, bookkeeping preparing, and the preparation and submission of VAT returns from as little as £99 a month.