Nobody likes to be saddled with taxes, but that is the way of life. Every economic activity that we do, even the most straightforward act of buying a pack of biscuits, is taxed. There are different kinds of it—income, property, federal—but all kinds of taxes have one destination: the government’s hands. One tax in particular that we, as business people, need to get acquainted with is the Value Added Tax. In this article, we will also tackle how long it takes for HMRC to pay my VAT refund?
Value Added Tax is a business tax placed on every kind of product or service for sale. It is a government-mandated consumption fee where an added value is set on a product at each stage of the supply chain—from the product’s production to its sale. VAT applies to all products and services that are bought, sold, and used within a country that operates on this particular taxation law. Currently, there are more than 160 countries that have adopted the VAT system, and the European Union is one of them.
Businesses with an annual turnover higher than their country’s VAT threshold must register for value-added tax. VAT-registered enterprises, big or small, must follow three things:
- Charge the current value-added percentage to all the goods and services that your business sells.
- Pay the value-added tax on products and services you purchase from other establishments.
- File a refund or repayment to HMRC every quarter, if applicable.
What Are The Different Rates?
- Standard rate – as of 2011, the standard rate of 20% is applied to all products and services that are not under the exempt, zero, and reduced rate.
- Exempt supplies – goods and services that are not charged with VAT include insurance, finance, credit, education and training, fundraising by charities, payment for membership organizations, and some doctor and dental services. Businesses that supply these exempt services should not charge value-added tax. However, a VAT-registered enterprise that also offers some exempt supplies may apply to reclaim the input tax.
- Zero rate – foods (except restaurant and takeout meals), prescriptions, books, newspapers, children’s clothing, and new house sales are all under the zero rate tax.
- Reduced rate – a reduced rate of 5% is added to supplies such as fuel and power that are used by households and charities.
VAT Refund and Repayments
HMRC or Her Majesty’s Revenue and Custom is a government organization that is responsible for tax collection, among other things. Any enterprise is entitled to a refund or reimbursement for any VAT-charged goods and services that they purchased for business use. Countries have differing qualifications for business expenses that are eligible for tax deductions. However, most countries consider these items and services VAT-deductible when purchased for business use.
- Public transportation, car rental, and fuel
- Hotel accommodation expenses
- Business conferences, trade shows, intercompany seminars, and travel delegations
- Import VAT
- Marketing expenses
- Drop shipping
- Maintenance contracts and installations
You cannot reclaim taxes for anything that has been used for personal means, VAT-exempt supplies, business entertainment expenses, goods under VAT second-hand margin schemes, and business assets transferred as a going concern.
Companies may claim their VAT refund by submitting a VAT Return to HMRC. Provided that you have filed the necessary paperwork, such as records and invoices that support your refund claim, the HMRC will release your refund within 30 days of receiving your Return form. It will be directly refunded directly to your business bank account, assuming the information has been provided to the HMRC prior to filing the refund. Otherwise, HMRC sends you a cheque.
Complying with the taxation system is one of the most complicated parts of doing business. Before the tax season rolls in, familiarize yourself with all kinds of taxes that come with starting an enterprise. File and pay for it accordingly so that it would not come to haunt you in your sleep.