If you’re registering or already registered for VAT, then you’ll need to understand VAT codes. What they are, how they apply, and when to use different ones. Because it’s not as simple as the scheme you’re on – it’s also what you’re selling, and how. So even if you’re registered on a standard rate for VAT, you’ll need to know what to charge and when. So, let’s break it down.
What Are The VAT Rates?
The UK have several different VAT rates, and which one you apply depends on the goods or services you’re providing. If you’re VAT registered, then you need to know the 5 rates:
Standard Rate (20%): This is the most common and widely used rate, as it’s applied to the majority of goods and services sold. For example, most sales of clothes, electronics and consultancy services should be charged at this rate.
Reduced rate (5%): This is a lower rate that’s applied to essential goods and services. Things like Children’s car seats, domestic power and fuel, mobility aids, and even certain residential construction work.
Zero rate (0%): Another rate that’s only applied to specific items. Books, some food items, newspapers, and public transport, for example. It’s important to know that while you might charge 0% VAT on these items, you can still reclaim VAT on related costs.
Exempt (0%): This is different from Zero rate, because it essentially means that no VAT is ever charged on them at all. A few examples of exempt items would be financial services, insurance and education.
Outside the Scope: This is the rate you don’t hear about as often, and it’s because these things fall outside of the scope of VAT completely. They don’t affect your VAT at all, but they are still important for your books and accounting. Examples include wages, dividends and certain disbursements.
Why Is Getting Your VAT Codes Right Important
Properly managing your VAT codes is essential for all businesses, even if you’re not VAT registered yet. For one thing, VAT codes are what ensures that you’re charging and have reported the right amount of VAT, so you don’t over or under pay HMRC. It will also help you with your receipts and expenses, as you can reclaim VAT on eligible purchases. Again, this is all about tracking what you can claim and what you can’t so that you can claim the right amount back.
Then, of course, there’s staying compliant with HMRC. Not charging or reporting your VAT correctly can get you into all sorts of trouble with them, and they aren’t always the easiest to please. If you want to avoid audits and penalties, it’s worth getting it right the first time.
Finally, there’s getting an accurate view of your own finances. Keeping your VAT codes straight means that your financial reporting will reflect reality, rather than a fiction that could lead to a nasty surprise. Incorrect VAT coding can lead to errors in your accounting, which then affects everything from your profit margins to your tax returns.
How Do I Stay on Track With VAT?
I once worked with a business that hadn’t filed a VAT return in 5 years, even though they were VAT registered (and ironically didn’t need to be!). I was brought a carrier bag full of unopened brown envelopes, which was nicknamed ‘the bag of shame’ because the owner couldn’t bring himself to open them. It took a long time to sort that out, and needless to say there were a fair few penalties involved’ Don’t be like that business owner. Instead, stay on top of your VAT and use your rates properly by:
Check your VAT rates regularly: Tax laws and rates can change, so you can’t just look it up once and then never again. You need to check the HMRC rules and then review your transactions to make sure they’re all correct on a semi- regular basis. I generally say twice a year is good, or once a quarter if you’re keen.
Use accounting software: Modern accounting software is fantastic! It can automate VAT calculations and apply the right VAT rates for you. This reduces the risk of manual errors and helps speed up the process of doing VAT returns.
Ask for help: Noone got into business to spend hours managing VAT rates. If you’re finding yourself putting a lot of time into figuring out which VAT rates you need and getting your books straight, it might be time to bring in a professional to help you out.
That’s exactly what I do. I’m one of the ones who did set up a business to do the books, and sorting out VAT rates and returns is one of my favourite things to do. If you’re fed up of VAT, don’t hide away from it – the brown envelopes will still come. Give me a call, and I can make VAT one less thing you need to worry about.