Value Added Tax, commonly known as VAT, is a tax placed on almost all goods and services a business sells to other companies or consumers. The Tax Foundation describes it as a ‘consumption tax assessed on the value added in each production stage of a good or service.’ Every business that pays VAT for a part of a product or service gets credit for the VAT they have paid, but it is the business’s responsibility to ensure that their VAT is paid correctly and on time.
VAT is an integral part of running a successful business that needs to be carefully managed to ensure that your business is compliant with government taxes and regulations.
Understanding VAT: The Basics
Some key points to remember when talking about VAT are:
It is applied to commercial products and services across different layers of the value chain, from producing the goods, to distributing products, through to providing services. However, there is a threshold that a company has to exceed before it has to pay VAT and this varies depending on the country and its own rules and regulations.
It is a consumption tax because consumers pay in full for the VAT but the business is not charged. A set percentage determines the amount paid. This percentage also varies depending on the country – it is 20% in the UK and 21% in Europe.
Once you have received your VAT payment, you need to ensure that you allocate this amount to the relevant revenue authority – the HM Revenue and Customs (HMRC in the United Kingdom) – and you will then pay the total amount of VAT you have collected to the authority on a regular basis. This payment can be made every two months or every month dependent on the country and its regulations.
Registering for VAT: The First Step
As you have just discovered, if your business earns more than a certain amount, then it needs to register for VAT.
These steps take you through registering for VAT for the first time:
- Start by registering online with HMRC. You will need your Government Gateway User ID and Password to start the process. If you don’t have these, you can create a new sign-in as a new user. If you’ve lost or forgotten your password or Government Gateway User ID, you can follow a clear online walkthrough to help you get a new one.
- Your registration process is step-by-step and straightforward and will help you enter your business details while creating an online VAT account that will become one of your most invaluable resources. You can use this online account to pay your VAT, assess your status, file returns, and so much more.
- If you aren’t comfortable registering for VAT, you can use an accredited agent to handle the process. These accountants will not only run the VAT application for you, but they will help you to submit your VAT returns, ensure your payments are on time, ensure your VAT amounts are correct, and deal with any issues you may have with HMRC on your behalf.
- There are several businesses and situations that may mean you cannot register for VAT online. Some exemption schemes have different VAT rules that apply to specific sectors or types of business. If this applies to you, you must register by post using a particular VAT1 form. Once you have followed the postal requirements and received your VAT number, you can sign up for an online account.
- Once you have completed your VAT registration, you will receive a nine-digit VAT number to be included on every invoice you make and used to track your VAT progress.
- When you have received your VAT number and registration confirmation, you need to start charging VAT and reclaiming VAT from products or services you’ve bought since you registered. You cannot include VAT on your invoices until you’ve received your VAT number.
Paying VAT Online: A Step-by-Step Guide
You have to pay your VAT bill according to the deadline on your VAT return; it is usually one month and seven days after your last accounting period has ended. If you aren’t sure when you need to pay your VAT return, you should log into your online account with HMRC as this will provide you with insight into when your VAT return is due, when payment must be made and, if you’ve missed any payments, what penalties you need to pay.
To make a VAT payment online, follow these simple steps:
Step 1: Log into your HMRC Account
You must log into your online VAT account regularly to stay on top of your VAT payments and ensure your VAT processes are running smoothly. To log in, you will need the nine-digit VAT number provided when you registered, a Government Gateway User ID, and your password.
Step 2: Submit your VAT Return
- Set aside some time to submit your VAT return as it requires focus and plenty of documentation. While you must submit your return every month, you will only need to pay your VAT every three months. Tip: Set up calendar reminders so you submit your return on time and pay your monies owing on time.
- You will need to know the total number of sales and purchases you’ve made, how much VAT you owe, how much you can claim back from HMRC, and how much VAT the tax authority still owes you. VAT has to be included on every product and service you provide.
- You will need to use one of the accredited software solutions to submit your return. There is a list of the different software platforms allowed by HMRC here. This is required by almost all companies that are VAT registered and the software provider you have chosen should include a lot of advice and support to help you submit your return correctly.
- If you are using an accredited software, then it will fill in most of the VAT boxes that are provided by the online VAT return form. You must check that the numbers are correct and that you have properly completed each box.
- Once you’ve ensured all the boxes have been correctly filled in and that the numbers are correct, you can then submit the form to HMRC. It’s a good idea to use this time to check if you have any owing return or payments and to double-check your deadlines so you don’t get penalised.
Step 3: Pay Your VAT
There are several different ways in which you can pay your VAT. This is not an exhaustive list, but these are the most common ways to pay:
- You can set up a debit order directly when you log into your VAT online account. This is a very easy way to ensure you never miss a payment and that your payments are always on time. Just remember that this can take up to three days to clear, so ensure your direct debit is scheduled well in advance of your VAT payment deadline.
- Same-day payments can be made using online banking or telephone banking, as these will ensure your payments make it to HMRC, even if it is the weekend.
- Clearing House Automated Payment System (CHAPS) is also an excellent way to pay your VAT bill quickly. This is a same-day payment as long as you schedule it before 2 p.m., but it will charge you a fee.
- HMRC BillPay is a service that HMRC has designed to help you make your VAT payments nice and simple and you can use a variety of different payment methods, such as a debit card, business debit card or credit card. You will need your VAT number to log into BillPay and your card details to complete the transaction.
Meeting Deadlines & Avoiding Penalties
If you have missed any VAT payments, then you will be liable for penalties and interest charges. The system works on points – every time you submit to HMRC late, you will get a penalty point. When you reach a certain number of penalty points, you then get a £200 penalty fee. This fee will be charged on every additional late submission you make for as long as you stay at this threshold.
Unlocking Efficiency in VAT Payments: Embracing the Future of Business Finance
To maintain an excellent business reputation and a clean record, it is incredibly important that you submit your VAT returns and make your VAT payments on time. Ensure you follow all the guidelines for submitting online, check your data regularly and use a trusted and reliable financial management software that supports your business and helps you with your admin.
Blue dot provides VAT registered companies with access to a patented technology that’s comprehensively VAT compliant, ensuring you remain compliant and helping you stay ahead of your returns and payments. Driven by artificial intelligence (AI) and machine learning capabilities, the Blue dot platform harnesses the power of emerging technology to provide you with an end-to-end VAT experience that supports your business.
We can also help you calculate the recoverable VAT hidden in your employee spend so you can receive refunds from your tax authority while remaining compliant.