Updated on May 14, 2022
VAT is one of the more complex of UK taxes with lots of exceptions on what’s covered by VAT and how companies charge and pay VAT. All of which can make understanding how to calculate VAT confusing.
A tax on the sale of goods and services known as VAT is levied by the government. In theory, it’s easy to see how it works. It’s the responsibility of companies to collect and remit VAT to the government.
Businesses of all sizes are required to keep meticulous records and accurately calculate the amount of VAT they should be charging and paying to HMRC.
Calculations that are critical to grasp include the following:
– The amount of VAT your business should charge depends on the type of goods and services your company provides.
Alternative VAT schemes –
There are many VAT rates that apply to your firm, which might affect how much VAT you pay to HMRC.
VAT Return calculations –
Calculating how much VAT you must pay or claim back from HMRC, and how to fill out and submit your VAT return.
How VAT works
every company that makes more than $85,000 a year needs this service. You must register as a VAT business with HMRC and begin charging VAT on the goods and services your business offers when your revenue exceeds this threshold. The good news is that your firm will be able to recoup the VAT it pays on the goods and services it purchases.
VAT indicates that your company is in the role of tax collector. You are responsible for collecting and remitting to HMRC any VAT you have collected on your goods and services. You must file a VAT Return every three months when you pay HMRC for the VAT you collect. However, there are exceptions to this rule based on the VAT accounting scheme you choose to implement.
Not simply on commercial transactions, but on a wide range of goods and services as well, VAT is levied. Rental equipment and buildings, as well as reduced products or meals provided at a staff restaurant, will necessitate a VAT fee for the business. All the goods and services you must charge VAT on are referred to as “taxable supply” when put together.
For accurate VAT return calculations, you must know what services and items are subject to VAT and how much of that VAT you must charge. Many items and services are subject to a lower VAT rate than the typical 20%. For example, children’s car seats have a VAT charge of just 5%.
How to calculate VAT when selling products and services
If you sell products or services, you must figure out how much VAT to charge, and then include that amount on all receipts and invoices.
In addition to the standard rate of VAT, there are three additional rates:
Standard rate –
For most enterprises and most goods and services, the standard VAT rate of 20 percent is in place.
Reduced rate –
Various goods and services, such as smoking cessation products, caravans, and some energy-saving materials, are eligible for a 5% VAT reduction. The government maintains a list of VAT rates for various products and services. Check to discover whether any products your company offers are eligible for a reduced rate of VAT addition.
Zero rate –
Some products and services, including as children’s clothing and shoes, books, periodicals, and disability equipment, have a VAT charge of zero percent. All invoices and receipts issued by your company must still include a 0% VAT rate.
VAT calculation example
Products and services that are subject to the 20% standard rate of VAT will be taxed at that rate.
A 20% markup is required for any goods or services you sell. This can be accomplished simply multiplying the price by 1.2.
Your total VAT-inclusive pricing would be $60 if your business sells sports equipment for $50.
You list the item price (£50), the VAT (£10), and the total amount (£60) on the receipt or invoice.
There is a 5% VAT reduction for products and services that are subject to the reduced rate.
Adding 5% to the cost of the product or service is required. To achieve this, increase the cost of your service by.05.
If your company sells radiators for £50, you would multiply that price by 1.05 to get a total VAT-inclusive pricing of £52.50.
The price of the item (£50), the VAT (£2.50), and the total amount (£52.50) are all listed on the receipt or invoice.
There is no VAT if the goods or services are taxed at 0%.
The price you charge for the goods or services must be unchanged. This can be accomplished by just adding a single cent to the price you charge, therefore maintaining the original pricing.
A magazine that costs £5 is multiplied by 1 to get the total VAT inclusive price of £5.
The item’s price (£5), VAT (£0), and the total amount (£5) are all listed on the invoice or receipt.
Calculating how much VAT to pay HMRC
The process of determining how much VAT to pay HMRC is fairly simple. Your business’s VAT liability is typically the difference between the sales invoices it has issued on the products and services it has sold and the VAT it has paid on the goods and services it has purchased. There are certain exceptions to the general rule that you can deduct the entire VAT paid on all products and services.
Output VAT refers to the VAT your company receives from the sale of goods and services, whereas input VAT refers to the VAT your company pays.
An illustration of a VAT calculating formula is as follows:
Work out the difference between the amount of VAT your firm has charged and what it has paid in order to calculate your VAT Returns.
As an illustration, if your company sold goods and services for £12,000 and paid VAT of £2,000 on those same goods and services (output VAT), the VAT computation would be as follows:
To pay HMRC, you’ll need to pay £12,000 (output VAT) less £2,000 (input VAT).
A business charging £12,000 in VAT on products and services but paying £20,000 in VAT on goods and services acquired would have the VAT calculation as follows:.
HMRC should refund your company £8,000 in VAT (input VAT: £20,000; output VAT: £12,000). This is the difference between the input VAT and the output VAT.
Make sure you don’t include any VAT exceptions in your calculations and know when to apply VAT in your bookkeeping cycle.
VAT exceptions –
There are numerous exceptions to the general rule of what expenses are eligible for a VAT refund. The amount of VAT you can claim on certain transportation-related expenses, such as car rental and fuel, varies. In order to claim VAT on cars, the government has put up a helpful guide.
Accounting period –
The time period in which the product was sold or the service was provided is the time period in which HMRC is entitled to collect VAT. At the end of one accounting period, you may have provided a service such as consulting, but only issued an invoice at the beginning of another. The period during which the service was provided must be taken into account when calculating the VAT Return. For example, if you’re using the Cash Accounting VAT Scheme, this does not apply.
How to calculate your VAT Return
Except in a few cases, submitting a VAT return using VAT online services is mandatory. Because many of the calculations are done for you, filling out an online form to compute VAT is the most efficient method. Each of the nine boxes must be filled up with the correct numbers:
This box should be filled in with your company’s total sales tax (VAT) charged on goods and services, including any refunds or credit notes.
If you purchased goods and services from EU-registered suppliers in other EU member states, you must enter the amount of VAT you owe in Box 2. Box 4 may allow you to deduct this amount as input VAT, but check the regulations for deducting input VAT before claiming it.
This is the total amount owed to the government in taxes, which is known as output VAT, and is the sum of boxes 1 and 2.
Exclude credit notes, expenses for entertainment and unique exceptions like buying second-hand equipment under a special second-hand tax margin plan from the input VAT figure in Box 4 of your tax return. Goods purchased from VAT-registered vendors in other EU countries may be eligible for a VAT refund. This refund must match the amount in box 2.
Using the larger numbers in boxes 3 and 4 as a guide, subtract the smaller number from the larger number in box 5. If the number in box 3 is more than the number in box 4, you must pay HMRC the difference. If the sum in box 4 exceeds the sum in box 3, you may be eligible for a refund from HMRC.
Sales and purchases without VAT are included in boxes 6–9.
Flat Rate Scheme calculations
Flat Rate Scheme registration is open to some small enterprises. It is open to small enterprises with a revenue of less than £150,000, with the goal of making VAT accounting easier for them.
Your business gets assigned a lower VAT rate, such as 10%, which is the rate HMRC requires you to pay. It is possible for your firm to charge VAT at the regular rate, allowing you to retain some of the money you get in VAT revenue.
Except for capital expenses exceeding $2,000, your company is unable to claim VAT back on purchases.
When using the Flat Rate Scheme, the following formula should be used to figure out how much VAT you owe HMRC:
The Flat Rate Scheme has varying VAT rates for different sorts of businesses, such as a 4% charge for food retailing and a 14.5% rate for computer and IT consulting services.
Clients of an IT firm are charged $10,000 by the firm. By multiplying £10,000 by 1.2, you get a total VAT-inclusive bill of $12,000 with a VAT component of $2,000, which is how much VAT to charge.
Taxpayers in the United Kingdom are required to pay HMRC the £2,000 VAT they are charged. A VAT of £1,740 must be added to this total because the IT consultant is on a Flat Rate Scheme. To get at this figure, it must first divide £12,000 into 100 decimal places and then multiply the result by 14.5.
The IT consulting firm then pays HMRC £1,740 and keeps £260 of the original VAT it charged of £2,000 in total.