inews

What is Value Added Tax?

What is Value Added Tax?

Consumers pay VAT on most household products every day. It is a type of consumption tax that applies to both goods and services. 

This week’s blog at Roger Hatherall & Co looks at what Value Added Tax is and how it affects businesses.

VAT Explained

Value Added Tax (VAT) is the tax a company and consumers pay when purchasing goods or services. It is an essential part of any business’ financial plan. There are three main types of VAT, including:

  • Standard Rate
  • Reduced Rate
  • Zero Rate

The standard rate of VAT in the UK is 20% and this charge is applied to most household items. There are often changes or exemptions to this. For example, from 31 March 2021, catering and hot takeaway food that used to be taxable at the standard rate will instead be liable to the reduced rate.

The reduced rate is 5% and goods in this bracket include mobility aids for the elderly and electricity, gas and heating oil for domestic and residential use. Zero rate VAT applies to many products and services relating to charities, such as selling donated items.

How Does It Work?

Businesses with a turnover higher than £85,000 have to register with HMRC and charge VAT on their services and products. The tax is included in the price customers pay for goods, but companies are still required to pay the charge to HMRC when they file their VAT return.

Value Added Tax provides a financial incentive to earn more money and many VAT-registered companies save money by being registered. Some businesses who make below the £85,000 threshold voluntarily register for the tax.

How Accountants Can Help

Businesses can manage their own finances and accounts but hiring professional accountants can save both time and money for a growing company. Accountants will ensure all tax returns are filed on time and that you have claimed all the expenses you are entitled to.

Tax legislation changes regularly and accountants are kept up to date meaning that you don’t have to. Business owners that hire accountants have more time to focus on growing their brand and increasing sales.