Don't 'do a Vince' - remember your VAT
Last week it was revealed that Vince Cable had been fined £500 for failing to pay his VAT.
The business secretary neglected to pay the tax owed on his substantial freelance work, which is thought to consist mainly of book deals and media engagements.
Mr Cable said he made the error “unknowingly” – but if one of the men in charge of the economy can’t get their tax right, what hope is there for the rest of us?
What did Vince do?
The business secretary was fined because he didn’t tell HMRC that his earnings had passed the VAT registration threshold. He has significant income outside his Parliamentary salary and, like everyone else, is obliged to register for VAT when those earnings reach a certain level.
When do I need to register for VAT?
The current VAT registration threshold is £73,000. If, during the next 30 days, you expect your total VAT-liable turnover for the previous 12 months to exceed that level, you are obliged to register for VAT.
You will also have to register if, during the current year (from 1 January, rather than the financial year) you have received goods from other EU countries with a total value exceeding that threshold.
Can I register before that?
Yes. Some businesses choose to register voluntarily for VAT, even before their sales or acquisitions reach the relevant threshold.
There is a range of reasons why voluntary registration might be the right option for your business. Most commonly, businesses register because there is a clear financial reason for doing so. If, during the course of a VAT accounting period, you pay out more VAT than you charge, you will be able to apply to HMRC for a repayment of the difference. This is amongst the most frequently cited reasons for voluntary registration.
Alternatively, some businesses choose to register voluntarily in order to give the impression of size. If you would prefer for potential clients not to know that your turnover falls below the VAT registration threshold, you might choose to register voluntarily.
Read more about voluntary VAT registration.
How much VAT do I have to pay?
You already pay VAT on taxable goods and services, regardless of whether or not your business is VAT registered.
Somewhat confusingly, there are three rates of VAT. The standard rate is currently set at 20 per cent. The reduced rate, which applies to things like fuel and heating, is set at 5 per cent. Finally, some goods and services are ‘zero-rated’, meaning that they attract VAT at a rate of 0 per cent – as distinct from goods and services that are exempt from VAT, or which fall outside the UK VAT system.
If you are confused about your VAT responsibilities, you should seek advice from an accountant or tax professional.