At the most basic level, a sales tax – or sales tax – is a type of consumption tax levied on items that people purchase. Also called an indirect tax because companies collect it on behalf of the UK government. Businesses must register for VAT if their VATable turnover is more than £85,000. You can also register if your turnover is less than £85,000. As with any tax, there are a variety of factors that can impact compliance with VAT tax regulations. Some of them are listed below.
How does it work?
If you are a VAT registered business, you must charge VAT on the goods and services you sell unless they are exempt (more on this below).
Businesses must register for VAT with His Majesty’s Revenue & Customs (HRMC). As part of the “Making Tax Digital for VAT” initiative, all reporting is now done digitally.
As a company subject to VAT, you must:
- Include VAT in the price of all goods and services at the correct rate
- Keep records of how much VAT you pay on things you buy for your business
- Take VAT into account on any goods you import into the UK
- Report the amount of VAT you charge to your customers and the amount of VAT you have paid to other businesses by sending a VAT return — usually every three months
The VAT you owe is typically the difference between the VAT you paid to other businesses and the VAT you charged to your customers. If you paid more VAT than you were charged, you are generally entitled to a refund.
Current tariff structures and exceptions
The standard VAT rate for most purchases in the UK is currently 20%. However, there are other VAT rates that businesses need to be aware of. For example, certain products, including energy saving measures and child car seats, are subject to a reduced tax rate of 5%. Most food, books and newspapers are charged a zero rate – as the name suggests, 0%, and children’s clothing. Although VAT is not charged, sales of zero-rated goods and services must still be recorded and reported on a business’s VAT return. Stamps, financial and real estate transactions, among others, are exempt from VAT.
There are detailed thresholds for collecting and reporting VAT. Details of HRMC’s VAT registration thresholds and VAT accounting system thresholds can be found on the gov.uk VAT website at: https://www.gov.uk/how-vat-works/how-much-vat-you-must-charge.
Youngest trends, including digitalization
Tax compliance challenges exist not only in the UK but also globally, with inconsistent standards across Europe and around the world. Several trends, from global pandemic-related supply chain disruptions to immigration to slowdowns in economic activity, can lead to large fluctuations in the prices of goods and therefore tax calculations. Another recent development that aims to simplify the process is the comprehensive digitalization of tax reporting and collection.
As with most digitalization initiatives – and especially those involving government bureaucracies – there are inevitable growing pains. Ultimately, the digitalization of processes will significantly change the way indirect taxes are dealt with. Currently, VAT activities are divided into three areas: collection, validation and reporting. The digitalization of VAT This means that certain areas now require new technologies and automation to comply with reporting requirements. While automation will simplify many parts of the sales tax process, technology will not replace humans, but rather optimize their time by removing mundane, repetitive tasks from their schedule and allowing them to be more strategic in their overall tax approach.
How can you ensure you comply with VAT regulations?
Software like Thomson Reuters’ ONESOURCE solutions are designed to do exactly the tasks mentioned above: automate the tedious and mundane components of reporting and compliance. Comprehensive platforms like these can simplify and speed up the process Automating sales tax compliance and improving the accuracy of tax returns, returns and reports. By automating sales tax compliance, businesses can file their tax obligations accurately and on time.
In addition to automation By determining and calculating VAT on all transactions, the software can create a standardized and repeatable process for preparing and filing national and global transactions (i.e. GST or SUT tax returns by automating the compliance process from source data to filing.
Summary
They say that only two things in life are certain — death and taxes. While we have not yet found convincing technical solutions for the first step, we are well on the way to fully digitalizing tax compliance and reporting. For indirect taxes such as VAT, this should make accurate reporting and, in some cases, refunds much easier. Excellent solutions already exist to help you navigate and automate the complex world of UK tax law.
