How do I know how much VAT to pay?
When registered for VAT, you act as a tax collector for HMRC.
You charge VAT on the sales you make, and you reclaim the VAT from the purchases you have made.
You then pay the difference over to HMRC.
This is the standard way of calculating how much VAT is due to be paid.
When you are doing your bookkeeping in software (such as Xero or Quickbooks), you will specify how transactions are treated for VAT, and then you can run a VAT report, which details the VAT due (or reclaimable) to HMRC.
The VAT payment and return must be received by HMRC on or before one month and seven days after the end of the VAT quarter.
VAT on sales
The VAT you charge on sales depends on two things:
What you are selling
Where/who you are selling to
There are three different VAT rates, and you must make sure you charge the right amount.
If you are selling outside of the UK, there are also different rules for charging VAT.
You can find out which VAT rate is applicable here - https://www.gov.uk/vat-businesses/vat-rates
You must account for VAT on the full value of what you sell, even if you:
receive goods or services instead of money (for example, if you take something in part-exchange)
haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT
That means if you are VAT registered and you come to a barter agreement, you still need to pay that VAT (even though you received no cash) over to HMRC. Bartering will cost you cash.
VAT on purchases
You can usually reclaim the VAT paid on goods and services purchased for use in your business.
If a purchase is also for personal or private use, you can only reclaim the business proportion of the VAT.
You must keep records to support your claim and show how you arrived at the business proportion for a purchase. You must also have valid VAT invoices.
You cannot reclaim VAT for:
anything that’s only for private use
goods and services your business uses to make VAT-exempt supplies
business entertainment costs
goods sold to you under one of the VAT second-hand margin schemes
business assets that are transferred to you as a going concern
Telling HMRC about how much VAT you have to pay
HMRC requires that you declare the VAT amount due via submission of a VAT return. This needs to be done electronically, and therefore businesses usually use bookkeeping software (such as Xero or Quickbooks) to prepare their VAT return.
Making the VAT payment
The VAT payment needs to reach HMRC by the deadline date. You can find out the methods of making the payment here - https://www.annetteandco.co.uk/how-do-i-pay-vat/
Other methods of calculating VAT due
Other VAT schemes calculate VAT differently, including the Annual Accounting VAT Scheme and Flat Rate VAT scheme.
You can read about both of these schemes below:
You might also want to read:
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