How is VAT (Value Added Tax) Worked Out?

How is VAT Worked Out?

If your business has been correctly registered for VAT. You are aware of the rate that applies to the goods or services you provide, then you are ready to begin charging VAT.

How is VAT worked out in theory?

What you charge your customers is known as “output VAT,” or value-added tax. After registering for Value Added Tax. Businesses must provide the corresponding VAT amount next to each VATable item on sales invoices. Products that are subject to value-added tax (VAT) at any rate. Including the standard rate, the reduced rate, and the zero percent rate, are collectively known as VATable items.


When calculating the final price of an item, use the VAT rate established by the HM Revenue and Customs (HMRC). This is the price you must use. For example, if a business sells baby gear like a carrycot and babygrow. The VAT that must be collected from customers for the former is five percent (5%), while for the latter it must be zero percent (0%). The reason for this is that the VAT that is applicable to each of these products varies.

Value-added tax refunds allow you to get some of your money back from purchases.

Having read this, you should be comfortable with the steps involved in applying output VAT to customer purchases. What should you do, however, about the VAT that appears on the invoices your vendors provide you? If your business is VAT-registered. You may be eligible to submit an input VAT claim to HMRC to recover the VAT you’ve already paid.

When will I not be eligible to receive a VAT refund?

Unfortunately, there are some types of purchases that cannot be claimed for a VAT refund. Organizing get-togethers for one’s professional network is a perfect example. If you take a client or potential client out to dinner who is not an employee. The restaurant will charge them VAT. However, according to HMRC, you cannot recoup that VAT as an allowable business expense. You’ll have to pay for everything out of pocket.

It is unlikely that you will be able to recoup VAT payments. If the vendor does not issue a valid VAT invoice. You shouldn’t try to recoup VAT from questionable invoices or receipts (though there are some exceptions. For example, you can recoup VAT for VATable items even if you get a till receipt with the supplier’s VAT number on it). Tax inspectors will double-check the invoices you’ve received from your vendors if they decide to pay you a visit. You should go to an accountant before assuming you can write something off your taxes.

You won’t be able to reclaim any VAT paid on your behalf if the relevant invoice didn’t include VAT (e.g., your supplier isn’t VAT registered and didn’t charge you VAT).

The VAT Flat Rate Scheme also functions in a unique fashion. Except for substantial investments, input VAT is not refundable.

What will happen if your business does not obtain a VAT number?

If your business is not VAT registered, you cannot charge VAT to your customers, but you also cannot file a VAT claim for a refund.

A business must register for Value Added Tax if its annual taxable sales are above the threshold for registration. If you anticipate needing to recoup value-added tax on expenses, for instance, you may want to apply for a VAT number before you reach the statutory threshold. Yet, if your current and potential clients include the general public, you might choose to postpone registering for VAT unless legal obligations necessitate it. This is because non-VAT registered customers won’t reclaim VAT charged to them. Perhaps this client thinks your prices have increased.

Example: How VAT is worked out in practice?

A VAT-registered gardener charging £100 for a day’s labor increases that amount by 20% to accommodate tax. Therefore, non-VAT registered customers from the general public would see the gardener’s daily rate rise to £120 (£100 times 1.2 = £120) due to the inclusion of VAT. The gardener may have a harder difficulty competing with those who aren’t subject to value-added tax if they choose to register for VAT.

Taxsteins Ltd to the Rescue

To avoid penalties, you must register for VAT if your yearly revenue is more than £85,000 or if you expect it to be more than £85,000 in the next 12 months.

Don’t hesitate to get in touch with us for VAT Services at 02071559545 or info@taxsteins.co.uk:

We will determine the amount you will likely owe HMRC and assist you in resolving the matter with them if you have long since over the threshold and should have registered for VAT earlier. If your annual sales have been below £85,000 in the past, but you expect them to rise this year, we can review your financial records to see if you are right. If your annual sales have been £85,000 or less in the past, but you expect that number to increase, we can review your financial records to see if you qualify for VAT registration. In that scenario, we’ll become your official tax representatives and get to work right away.