Confused about VAT Tax? You’re not alone. Research shows that a third of otherwise financially savvy small business owners are confused by tax laws. Read on for the facts.

VAT tax is a self-assessed tax collected on business transactions, imports and acquisitions – basically any money spent by consumers. It’s relevant to business transactions involving goods and services, so if your business sells consumer products, you will have to pay the standard VAT rate of 15% (November, 2009 figure) of the cost of the product to customs.

VAT Tax - Reclaiming VAT - VAT Information

Some businesses are exempt from VAT, for example transactions made outside of the UK and the Isle of Man, and some products have a reduced VAT rate of just 5% - green products, for example. Either way, if your business supplies goods or services to consumers, you need to register for VAT. Even if your products will be VAT free or you turnover will be very small, you’ll still need to apply for an exemption.

Once you’re registered, you’ll need to charge an extra 17.5%, and keep records of every single one of your business transactions – leaving anything out is fraud. You also keep a record of all the VAT on your purchases. If the VAT on your sales is more than the VAT on your purchases, you have to pay customs the difference. On the plus side, if the VAT on your purchases is more than the VAT on your sales, you can claim the difference back.

Most VAT registered businesses are required to submit a quarterly VAT return declaring their liability by the last business day of the month, either on paper or online.

In the UK, more than 200,000 businesses submit their VAT returns late at each deadline, due to confusion, forgetfulness, difficulty paying or deliberate evasion – and the consequences can be disastrous. You could incur late payment interest and surcharges with no time to raise the additional funds, often leading to business failures and bankruptcy.

Still confused? You can get help. There are a number of schemes designed to assist small businesses in accounting for VAT, including a simplified flat rate, cash accounting and annual accounting schemes. Call the National Advice Service on 0845 010 9000 or visit www.hmce.gov.uk

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