Be honest: Do you really understand VAT accounting?

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Be honest: Do you really understand VAT accounting?

Many sole traders and limited companies that earn over a certain amount need to file separate VAT accounts to HMRC.

Unfortunately, many firms and individuals don’t understand how it works, particularly when they’re just starting out.

Therefore, in this post we take a look at how VAT relates to small business accounting and what you need to know about it.

VAT rates

The government breaks VAT down into various rates, depending on what you sell. Most goods and services attract a 20 percent rate. However, some qualify for the “reduced rate” of 5 percent, such as children’s car seats and home energy.

Other items are zero-rated. This means that you do not have to charge VAT at all. This applies to most children’s clothes and food.

Remember, you must charge VAT on the other items, including when loaning goods to someone else, or selling business assets.

VAT Limits

If you operate a business with a taxable turnover of more than £85,000 in any given twelve-month period, then you must register for VAT by law. If you earn less than this but believe that you may breach the threshold in the future, it is wise to register, even if legally, you do not have to charge customers VAT.

VAT Rules

When you become a VAT-registered business with HMRC, you need to follow value-added tax rules. You must, for instance, include the price of all goods and services you sell at the correct rate. You must also keep records of how much VAT you pay other businesses to acquire the things you need to run your operations. You can then subtract the VAT you pay to other businesses from the VAT you charge your customers to avoid double-paying.

At the end of the quarter (every three months), you must send HMRC details about the amount of VAT you’ve charged your customers and what you’ve paid to other businesses. You also need to pay HMRC the VAT that customers paid you when they bought your products.

If you think that you have overpaid or underpaid VAT, you can get help from limited company accounting experts. HMRC will usually refund overpayments, but you may have to wait.

If you’re in the Manchester area and looking for VAT accounting assistance, contact us to see what we can do for you.

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