With a constant stream of changes to the Value Added Tax (VAT) regulations, business can find it difficult to ensure they comply. As a self-assessed tax, businesses are expected to correctly interpret and implement the law and failure to do this can lead to unwanted inspection, penalties, surcharges and potentially significant VAT arrears.
What is VAT and how does it affect businesses?
VAT is a tax on consumer spending. In short businesses recover the VAT they’ve paid on their purchases and then charge VAT on their sales. This means that VAT is collected all the way down the supply chain until the VAT is borne by the final consumer.
Who needs to register for VAT?
It is compulsory to register for VAT if you breach the VAT registration threshold.
However, businesses may want to apply for voluntary VAT registration if they are recovering more VAT from HMRC than they are paying them.
What is a VAT return?
If a company is VAT registered, they will have to complete VAT returns. This is a record of the amount of input VAT that has been incurred and the amount of output VAT that has been charged to customers. This will result in a net payment to or repayment from HMRC.
Making Tax Digital for Business
In April 2019 HMRC introduced "Making Tax Digital for Business" (MTDfB) which required VAT registered businesses to keep VAT records and submit VAT records electronically via "functional compatible software"