Credit cards are the lifeline for most people and they provide variety of benefits for example you can get rewards points for shopping which you can later redeem, credit cards do provide cashback, miles benefits if you use them for air travel and discounts for using the credit card for fuel at gas stations. However, if do not use credit cards carefully because they can lead you into high interest debt and financial trouble as it can throw your personal finance off balance. Misusing the credit cards can impact your credit score severely.

Understanding Credit Cards in the UK

There are various credit cards which are available in the United Kingdom and every card provides a different feature and benefits. It is very important to go through the benefits of the card like annual membership fee, interest rates, introductory offers, benefits on grocer shopping and travel rewards.

Standard Credit Cards: As the name suggests these are cards with standard services and no rewards points or cashback schemes but generally these are the cards which come with no annual membership fee. So, these are free to use and most banks provide introductory interest rate offers on purchases on these cards.
Rewards Credit Cards: These are the credit cards which comes with the feature of reward points which means you will be get reward point for every pound you will spend using your credit card. Some banks provide the card with double cash reward schemes which means that you will get one reward point when you will spend the money and one reward point when you will make the payment for the balance in your card. The reward points that you have earned can be redeemed later either through a check, transfer to your checking account or gift cards for various stores.
Cashback Credit Cards: As the name suggests these are the cards which provides some percentage of your spending back to your credit card available balance which we call cashback. Cashback credit cards are best suited for the people who use the credit cards for various needs like shopping, groceries, travel, fuel, etc. There are various offers provided by the banks at various seasons to get extra points or increased cashback. These cards are perfect to save money in terms of cashback.
Balance Transfer Credit Cards: These are credit which comes with the feature of balance transfer which is in simple words is the feature to consolidate or transfer your debt from other cards to the present card usually at a zero percent interest rate for a predefined period by the banks. These cards provide an excellent facility to consolidate the debt at low interest which results in substantial savings in terms of the interest that would have paid for the balances in the other cards.
Travel Credit Cards: These are the cards which give you points on air travel, hotel reservations etc. These are best suited for the people who travel frequently. The benefits may vary with different cards. Banks also provide offers give some extra mile points on covering some specific number of miles.
Credit Builder Cards: These are similar to secured cards provided in the United States, the collateral amount submitted while getting the card is used as a credit limit and the customer can deposit the money in the account in case the limit is utilized. These are basically used to improve credit score so that consumers will eligible for the credit card. Banks review the eligibility of the user usually after one year to decide to upgrade to a credit card.

Best Practices for Using Credit Cards in the UK

Choose the Right Card: If you select the right card as per your needs more than half of your work is done for an example if you need card for everyday shopping then the rewards is the best card for you, if you travel a lot then the travel card is best for you and if you use your card rarely then the standard card is the best choice for you.
Assess Your Needs: Utilization of credit card should be sensible; you should only use your card either strictly for your needs or in case of emergencies. Unnecessary use of the credit card must be avoided as it can put you in the zone higher and can create issues with your credit score.
Compare Offers: Most people are not aware about the benefits of comparing features like interest rates, introductory offers, and rewards schemes, it is just like getting a pair of jeans for yourself you will pick the one which suits your needs and is beneficial in terms of price. In context of the United Kingdom, you can visit websites like Money supermarket, compare the market, or Uswitch to find the best deals regarding credit cards.
Maximize Rewards and Cashback: You can take the advantage of the reward points by charging the regular expenses like groceries, fuel and bills to credit and accumulate the points to redeem them later. You should lookout for the special promotions for higher rewards or cashback which banks might provide for a limited time every year.
Manage Your Spending: It is really common sense you only bite what you can chew, similarly in case of credit cards you should only charge what you can easily afford to pay because it would be you who would be paying the interest on your balance. Tracking your spendings can really help in controlling and even stopping you from going over the limit on your and almost every card provider has an app for credit card customer where you can easily keep track of your expenses.
Build and Maintain Good Credit: Building a good credit score is like building trust with the creditors that you can responsibly manage your debt. The best ways to manage would be to keep the credit card balances low and make at least minimum payment due each month before due date to avoid getting past due charges which can give negative remarks on your credit report. Keeping your credit utilization below 30 per cent is recommended. Checking your credit report regularly is a good habit which ensures that credit history is reported accurately and there are no errors that can impact your credit score.
Use Balance Transfer Offers Wisely: Consolidating credit form a former credit into a new credit card by using the balance transfer offers can really save substantial amount of money. The best strategy would be to transfer the balances from your old cards to the new card and take advantage of the introductory balance transfer offers to save interest. Try to pay the balance transfer amount within the introductory period as the once the period is over this balance transfer amount will be charged at the regular interest rate for purchases.
Travel Smart with Credit Cards: You can avoid foreign transaction fees which is the fee charged when you are charging your card at a merchant in foreign currency. Travel card cards also provide very reasonable rates for currency exchange. Not only in terms of the fees and the exchange rates every time you travel internationally you should notify the card provider to make sure that your card is working without any interruption during your travel.
Leverage Consumer Protection: United Kingdom has amazing consumer protection laws which safeguards the consumers from fraudulent activities. Section 75 of consumer credit act ensures the protection for customer’s money if the goods or services are not up to the mark or not delivered under the range of 100 pounds to 30,000 pounds. For the charges below 100 pounds customers can request a charge back from the card provider if something is wrong about the transaction.
Stay Safe Online: We all do majority of our transactions by using websites and applications which is a great advantage of technology. However, with the advancement in technology chances of frauds have risen as well. Consumers must be aware about online security and should only use secured websites for transaction using credit cards, a common tip here would be to look for HTTPS in the URL of website on which you are making the transaction.
Tips for Choosing the Best Credit Card: Tips for choosing a credit card would be really simple you should get the cards with lower interest rate if you are not going to pay the balances in full every month. Make sure that there is no annual fee for the card and if there is a fee make sure that the benefits are worth paying an annual fee for the card. Check for introductory offers on purchases or balance transfers so that you can consolidate debt or create an asset at zero per cent interest. At last, you must check for the rewards and benefits associated with the card like travel insurance, purchase protection, extended warranties and cashback offers.

Value Added Tax (VAT) schemes in the UK are designed to simplify VAT administration for businesses and provide options for managing VAT liabilities. It’s important for businesses to monitor their taxable turnover regularly to determine their VAT obligations and eligibility for VAT accounting schemes. Understanding these thresholds can help businesses manage their VAT compliance and choose the most suitable VAT accounting scheme for their needs.

Here’s an overview of the main VAT Accounting schemes in UK available:

1. The VAT Flat Rate Scheme

It is a simplified VAT accounting method designed to make it easier for small businesses to calculate and manage their VAT liabilities. Under this scheme, instead of calculating and accounting for VAT on each individual sale and purchase, eligible businesses apply a fixed flat rate percentage to their VAT-inclusive turnover.

Who are eligible for VAT flat rate scheme?

Businesses with a VAT taxable turnover (excluding VAT) of £150,000 or less in the past 12 months (excluding VAT) are eligible to join the VAT Flat Rate Scheme. Once registered for the scheme, businesses can remain in it until their total income (excluding VAT) exceeds £230,000.

How it Works:

Businesses applying the Flat Rate Scheme use a fixed flat rate percentage determined by HMRC based on the industry sector of the business. The flat rate percentages range from 4% to 16.5%, depending on the type of business.

Calculating VAT Liability: Instead of calculating VAT on each sale and purchase individually, businesses simply apply the flat rate percentage to their VAT-inclusive turnover for the period. The result is the VAT liability that the business owes to HMRC.

Input Tax: Businesses under the Flat Rate Scheme generally cannot reclaim VAT on most purchases, with some exceptions for certain capital assets over £2,000 and specific goods.

To join, fill in form VAT600FRS, if you’ve already registered for VAT. You can leave the scheme if you are no longer required to file VAT. Remember, once left you cannot join the scheme again for the next 12 months.

2. VAT Annual Accounting Scheme

This scheme is designed to simplify VAT administration for eligible businesses in the UK. Under this scheme, businesses submit one VAT return annually and make advance payments towards their VAT liability based on estimated turnover.

Who are eligible for VAT annual accounting scheme?

The VAT Annual Accounting Scheme is available to businesses with an annual taxable turnover of up to £1.35 million.

Certain businesses are not eligible for the scheme, including those involved in certain financial services, businesses that have been penalized for VAT evasion or other VAT-related offenses, and businesses that have been subject to certain insolvency procedures.

Accounting Method:

Under the Annual Accounting Scheme, businesses submit one VAT return annually, rather than quarterly. Businesses make advance payments towards their VAT liability based on their estimated turnover for the accounting period.

These advance payments are typically made on a monthly or quarterly basis throughout the year.

VAT Returns:

The VAT return includes details of the VAT due on sales and VAT reclaimable on purchases for the entire accounting period. Businesses may need to make a final adjustment to their VAT liability based on their actual turnover for the year.

Advance Payments:

Businesses estimate their annual turnover when applying for the Annual Accounting Scheme and make advance payments towards their VAT liability based on this estimate. The advance payments are calculated based on a predetermined percentage of the estimated annual turnover, with the percentage varying depending on the frequency of payments (monthly or quarterly).

Advance Payment	Deadline to pay advance payment	How much to Pay
Monthly	Due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12	10% of your estimated VAT bill
Quarterly	Quarterly Due at the end of months 4, 7 and 10	25% of your estimated VAT bill
Final Payment	Within 2 months after the end of your accounting period.	Difference between advance payment and actual VAT bill.

At the end of the accounting period, HMRC reconciles the advance payments with the actual VAT liability based on the business’s actual turnover for the year.

To join, fill in form VAT600 AA, if you’ve already registered for VAT. You can leave the scheme if you are no longer required to file VAT. Remember, once left you cannot join the scheme again for the next 12 months.

If you overpaid the advance, you could claim for refund. Please note, you will only be able to get 1 refund in a year.

3. Cash Accounting Scheme

Under this scheme, businesses account for VAT based on the payments they receive and make, rather than on invoices issued and received.

Who are eligible for VAT Cash Accounting scheme?

The VAT Cash Accounting Scheme is available to businesses with an annual taxable turnover of up to £1.35 million. Also, you have not joined the VAT Flat rate scheme.

Accounting Method:

Businesses only account for VAT on their sales when they receive payment from their customers.
Similarly, businesses can reclaim VAT on their purchases when they make payments to their suppliers.

This means that VAT is only accounted for when cash transactions occur, rather than when invoices are issued or received.

Cash Flow Management:

The Cash Accounting Scheme can help businesses manage their cash flow more effectively by allowing them to defer VAT payments until they receive payment from their customers. This can be particularly beneficial for businesses with irregular cash flows or long payment terms, as it provides greater flexibility in managing VAT payments.

VAT Returns:

Businesses using the Cash Accounting Scheme still need to submit VAT returns to HMRC on a regular basis. VAT returns include details of the VAT due on sales and VAT reclaimable on purchases for the accounting period. VAT returns are typically submitted on a quarterly basis, but businesses can also opt to submit monthly or annual VAT returns.

4. VAT Margin Schemes

The VAT Margin Scheme is a special VAT accounting scheme that applies to the sale of second-hand goods, works of art, antiques, and collectors’ items. You cannot use margin scheme for any item you bought for which you were charged VAT, precious metals, investment gold and precious stones. Certain goods are excluded from the scheme, including new goods, items sold under auctioneers’ schemes, and items acquired for export outside the EU.

It allows businesses to calculate VAT based on the difference between the selling price and the purchase price of these goods, rather than on the full selling price, i.e.,

VAT payable = Selling price of goods – Purchase price of goods

You pay VAT at 16.67% (one-sixth) on the difference.

For items that aren’t covered under Margin schemes, like business overheads, repairs, or parts, they should be reclaimed under Standard VAT returns.

Businesses using the VAT Margin Scheme must keep specific records of their purchases and sales, including details of the purchase price, selling price, VAT calculation, and any other relevant information. Records must be kept for at least six years and be available for inspection by HM Revenue & Customs (HMRC).

The VAT rate applied to the margin depends on the type of goods sold and whether the business is using the Global Accounting Scheme or the Individual Items Scheme.

Global Accounting Scheme:

It allows businesses to calculate the total margin for all eligible goods sold during a VAT accounting period and apply the appropriate VAT rate to determine the VAT payable. This scheme is suitable for businesses that sell a large volume of low-value items with similar VAT rates.

VAT payable = total selling price of eligible goods – total purchase price of these goods

Individual Items Scheme:

It allows businesses to calculate the margin and apply the VAT rate separately to each eligible item sold. This scheme is suitable for businesses that sell high-value items with different VAT rates or that want to track VAT on each item individually.

VAT payable = selling price – purchase price of each eligible item

This scheme provides granular VAT calculation and great flexibility to businesses in pricing and VAT management by applying different VAT rates to different items sold.

5. VAT Retail Schemes

VAT retail schemes are special VAT accounting methods designed for businesses operating in the retail sector. These schemes provide simplified VAT accounting options tailored to the specific needs of retail businesses, allowing them to calculate VAT on their sales in a more straightforward manner. This scheme is applicable to the businesses with a turnover less than £130 million. There are 3 VAT retail schemes:

6. Point of Sale Scheme (PoS):

Under this scheme, businesses calculate VAT on their sales at the point of sale or when the goods are sold to customers. VAT is calculated based on the selling price of the goods, including any applicable discounts, and is accounted for in the VAT return for the period in which the sale occurs.

How to calculate:

Add up all the sales for each VAT rate for the VAT return period.
For 20% rated goods, divide the sales by 6.
For 5% rated goods, divide the sales by 21.

Example:

You’ve sold £30,000 worth of 20% rated goods, and
£1000 worth of 5% rated goods.

VAT to be paid = (£30,000 / 6) + (£1000/5)

= £5,200

This means, you need to record a total of £4,005 for the VAT return period.

7. Apportionment Scheme:

Under this scheme, businesses apportion their sales into different VAT rate categories based on the proportion of each type of sale. VAT is then calculated separately for each category of sale, allowing businesses to apply the appropriate VAT rate to each portion of their sales. This scheme helps businesses accurately account for VAT on mixed supplies and ensures compliance with VAT regulations for different types of goods.

This scheme could be used if you buy goods for resale. It can’t be used if you provide services, goods that you’ve made or grown yourself, catering services, and the turnover (excluding VAT) can’t be more than £1 million a year.

How to calculate your VAT

Calculate the total value of goods purchased for resale in the VAT period for each VAT rate.
Divide the total of purchases for each VAT rate by the total for all purchases.
Multiply the outcome by your total sales, divided by 6 for 20% rated goods, and divided by 21 for 5% rated goods.

To calculate the total VAT for the period=

(total value of purchase for 20% VAT rate / total purchase ) * (total sales/6) + (total value of purchase for 5% VAT rate / total purchase ) * (total sales/21)

Example

In the VAT period you buy goods at the following VAT rates:

Total value of goods purchased	VAT rate
£20,000	20%
£5,000	5%
£5,000	0%
Total Purchase	£30,000

Let’s assume your total sales are £40,000.

Total VAT for the period:

= {(£20,000 / £30,000) x (£40,000 / 6 )} + {(£5,000 / £30,000) x (£40,000 / 21)} = £6,667.33 + £1,904.92

= £8,572.25

8. Direct Calculation Scheme:

The Direct Calculation Scheme is available to businesses that sell goods subject to VAT at different rates and have a turnover below a certain threshold.

This scheme simplifies VAT accounting by providing businesses with a straightforward method for calculating VAT on their sales, based on predetermined mark-ups. This scheme is useful, if you make a small proportion of sales at one VAT rate and the majority at another rate. Your turnover (excluding VAT) can’t be more than £1 million a year.

How to calculate your VAT:

Calculate the expected selling prices (ESPs) for your minority or majority goods. Use the one that’s easier.
Total up the ESP for the VAT period.
If your goods are standard rated at 20% divide the total ESP by 6. If they’re zero rated, deduct the total ESP from your total sales. This will give you your sales at 20%. Then divide by 6.
If you have reduced-rate (5%) goods deduct the ESP of this from your sales before calculating your VAT at 20%. Then calculate the VAT due on reduced-rate goods by dividing the ESP of these by 21. Add this figure to your 20% VAT to get total VAT due.

Example:

Let’s consider a retail business that sells a variety of goods subject to different VAT rates:

Goods Category	VAT Rate	Good cost price	Predetermined Percentage Mark-ups (Assumption)
Standard-rated goods	20%	£100	50%
Reduced-rated goods	5%	80	30%
Zero-rated goods	0%	£120	20%

Let’s calculate VAT for each type of goods sold:

The business calculates VAT on its sales using the predetermined percentage mark-ups on the cost prices of goods.

Selling price = Cost price + (Cost price × VAT rate mark-up percentage)

Goods Category	Selling Price	VAT
Standard-rated goods	£100 + (£100 × 50%) = £150	20% of £150 = £30
Reduced-rated goods	£80 + (£80 × 30%) = £104	5% of £104 = £5.20
Zero-rated goods	£120 + (£120 × 20%) = £144	0% of £144 = £0

Total VAT Liability:

The business adds up the VAT amounts calculated for each type of goods sold to determine its total VAT liability for the accounting period.

Total VAT liability = VAT on standard-rated goods + VAT on reduced-rated goods + VAT on zero-rated goods

Total VAT liability = £30 + £5.20 + £0 = £35.20

Submission of VAT Returns:

The business includes the total VAT liability calculated using the Direct Calculation Scheme in its VAT returns, which are typically submitted to HMRC on a quarterly basis.

By using the Direct Calculation Scheme, the retail business can accurately calculate its VAT liability based on predetermined mark-ups on the cost prices of goods, providing a simplified method of VAT accounting for businesses with diverse product offerings and different VAT rates.

VAT overpaid or underpaid:

If you pay too little VAT, then you may be charged 7.75% interest by HMRC.
If you pay too much VAT, then you may be able to claim 4.25% interest to HMRC. Please note, HMRC will not usually repay interest if you’ve paid too much VAT because of a mistake you made.

Goods can be dispatched by post, courier or collected by person. Before you charge zero-rate VAT on the goods, make sure you have sufficient bill to support that the goods are exported outside the UK.

Q-1 What will happen if the exported goods are returned?

You do not have pay any VAT tax as no sale has taken place.

Q-2 Can you charge zero-rate VAT on the goods intended to go outside UK but collected by someone within UK?

You don’t have to charge VAT for goods going outside the UK if they’re being picked up by someone in person, but you’ve got to show evidence that the goods will/are being exported out of the UK. You must charge VAT on a good that’s couriered to someone in the UK before it’s exported outside UK, since it’s not being exported directly.

Q-3 What will happen if you send goods from Northern Ireland outside EU and UK?

You will charge zero-rate VAT on the goods.

Q-4 What will happen when the goods are exported outside the EU but transit through it?

You will charge zero-rate VAT if the goods are delivered to EU country but not sold and the EU business process the goods to the intended recipient outside the EU. Maintain a record of proofs to support the export destination.

Q-5 Which country VAT rules to use when exporting goods?

You will be following the VAT rules of the destination country, it always depends on the rules defined for the place of supply.

Q-6 What will happen if you are importing goods but not a registered VAT?

You still need to pay VAT on the imported goods but will not be able to claim the VAT to the HMRC.

Businesses importing goods or services into the UK must ensure compliance with VAT and customs regulations, including registering for VAT and obtaining appropriate import documentation, such as import declarations and customs clearance documents.

Importing Vehicle into the UK

If you intend to bring vehicle in the UK, then you must comply to UK rules before importing a vehicle permanently in the UK.

Inform HMRC about your intent to bring a vehicle to the UK.
Pay custom duty and VAT on the vehicle import.
Ensure that your vehicle complies with UK regulations, including safety, emissions, and technical standards.
Register your vehicle with the Driver and Vehicle Licensing Agency (DVLA) in the UK.
Pay vehicle tax.

The below table details the VAT rate charged under different situations.

#	Category	Situation	VAT charged
1	Export of goods	Send goods to a destination outside UK	Zero-rate
2	Export of goods	Send goods from Northern Ireland to a destination outside UK and EU	Zero-rate
3	Import of goods	Goods imported in the UK	Same as standard VAT rate, except for artworks, antiques, and collectors’ items, these are charged at reduced VAT rate.
4	Import of vehicle	Decide to import a vehicle to the UK	HMRC will decide the payable VAT depending on the vehicle’s value, age, and origin.
5	Building Houses	Build a new house or work for disabled people in the house	Zero-rate VAT
6	Building Houses	Renovating a house/flat Converting a building into a flat/house Installing energy saving products	Reduced-rate VAT

Different schemes that could be used while building a house/flat.

DIY housebuilders’ Scheme

You can reclaim VAT on the self-building houses under the DIY housebuilders’ scheme. The scheme is available to individuals who are building or commissioning the construction of a new residential property for use as their main residence.

The property must not be intended for use as a business premises or for any commercial purposes. Self-builders must submit their VAT reclaim claims to HMRC within six months of the completion of the construction work.

VAT Domestic Reverse Charge Scheme

The VAT Domestic Reverse Charge scheme shifts the responsibility for accounting for VAT from the supplier to the customer (recipient) of the construction services. With this scheme, HMRC aims to reduce the risk of missing trader fraud and improve compliance within the construction sector by preventing the misdeclaration or non-payment of VAT. It primarily applies to businesses involved in construction and building services, including construction contractors and subcontractors.

How it works?

A Supplier provides relevant construction services to VAT-registered customers issuing invoices that indicate a reverse charge applies for the VAT amount and state that the customer is responsible for calculating the VAT amount. The supplier does not charge VAT on their invoice, but instead, the customer self-accounts for both VAT on purchase and VAT on sales in their VAT return. The customer must report both input and output VAT amounts on the same VAT return, which results in the net VAT liability.

Where it cannot be used?

Domestic Reverse Charge should not be used in below situations.

Exempt supplies like financial services, healthcare services, and educational services, among others.
When the end customer or consumer is the recipient of the goods or services.
Retail schemes, which are used by retailers to account for VAT on sales to the public, should not be combined with the Domestic Reverse Charge
Transactions involving business-to-consumer (B2C) sales should not use the Domestic Reverse Charge.
Supplies that fall outside the VAT scope or are subject to different VAT rate.

Value Added Tax (VAT) is applicable to a wide range of businesses and individuals involved in the supply of goods and services. This guide will give you a deeper understanding on VAT registration thresholds, rates, and rules which may vary depending on factors such as the type of business, the nature of supplies, and the volume of turnover.

What is taxable turnover?

The total sales of goods and services subject to VAT.

VAT Registration Exemption threshold

Tax Year 2024-25

£85,000

Who must file VAT?

Businesses with a total taxable turnover for the last 12 months exceeding the VAT registration threshold must register for VAT and file VAT returns.
Businesses with a taxable turnover below the VAT registration threshold can choose to register for VAT voluntarily.
Some businesses are required to register for VAT regardless of their turnover. This includes businesses that:

Receive goods from other EU countries worth over £85,000.
Expect to exceed the VAT threshold in the next 30 days.
Take over a business that is already registered for VAT.
Join a VAT group or division.

Non-established-taxable-persons (NETPs) must register for VAT if they make any taxable supplies in the UK. NETP is any person who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated in the UK.

Once registered for VAT, businesses must charge VAT on their taxable sales (output tax) and can reclaim VAT on their eligible business purchases (input tax). They must then file VAT returns with HMRC, typically on a quarterly basis, reporting the amount of VAT collected and paid during the reporting period.

What will happen if you do not register for VAT?

Failure to register for VAT when required or to file VAT returns correctly and on time can result in penalties and interest charges from HMRC. The amount of penalties are based on the net VAT due from the time you should’ve registered to the time HMRC received your application or realized you needed to register.

Situation	Penalty rate
If you registered less than 9 months late	5%
If you registered 9-18 months late	10%
If you registered more than 18 months late	15%

VAT Compliance Rules to follow:

Once you are registered for VAT, you’ll need to comply with VAT rules, including:

Charging VAT: You must charge VAT on your sales at the appropriate rate (standard rate, reduced rate, or zero rate), and issue VAT invoices to your customers.
Claiming VAT: You can reclaim VAT on your business expenses, known as input tax, subject to the usual rules and restrictions.
Filing VAT Returns: You’ll need to file regular VAT Returns with HMRC, usually on a quarterly basis, even if you have no VAT to pay or reclaim.
Making Payments: If your VAT taxable turnover exceeds the VAT registration threshold, you’ll need to pay any VAT due to HMRC by the deadline specified on your VAT Return.

If your turnover exceeds the VAT registration threshold, you must notify HMRC within 30 days and register for VAT accordingly.

How to Calculate taxable turnover?

Let’s say you run a small retail business selling clothing. Over the past 12 months, your sales are as follows:

#	Sale Record	VAT Rate Charged	Total Sale (including the VAT charged to customer)
1	Sales of clothing (subject to standard rate VAT)	20% (Standard Rate)	£70,000
2	Sales of children’s shoes (subject to reduced rate VAT	5% (Reduced Rate)	£10,000
3	Sales of books (subject to zero rate VAT)	0% (Zero Rate)	£5,000
4	Exempt sales (not subject to VAT) e.g., sales of second-hand clothing	–	£15,000

To calculate your taxable turnover, you would add up the total value of your taxable sales subject to VAT:

Total Taxable Turnover = Sales of clothing + Sales of children’s shoes

= £70,000 + £10,000

= £80,000

In this example, your total taxable turnover is £80,000.

What should be done if total taxable turnover is above VAT registration threshold (£85,000)?

Let’s assume your total taxable turnover is £100,000.

With a total taxable turnover of £100,000, you’ll need to calculate the total VAT collected on your sales. This is done by applying the appropriate VAT rate to your taxable turnover.

Total VAT Collected = Total Taxable Turnover × VAT Rate

Assuming all your sales are subject to the standard rate of VAT (20%), the total VAT collected would be:

Total VAT Collected = £100,000 × 0.20 = £20,000

You’ll be required to pay the HMRC, the total VAT collected, deducting any VAT you’ve paid on your business expenses (input tax) by the deadline specified on your VAT return.

Let’s suppose you incurred £25,000 in business expenses, on which you paid £4,100 VAT.

You need to pay net VAT liability to the HMRC, which is:

Net VAT Liability = Total VAT collected via sales – Total VAT paid on business expenses

Or = Output VAT – Input VAT

= £20,000 – £4,100

= £15,900

So, the total tax to paid to the HMRC for the above scenario is £15,900. In layman’s term, if your input tax is less than your output tax, you’ll need to pay the difference to HMRC. If your input tax exceeds your output tax, you may be eligible for a VAT refund.

Review Exempt and Non-Taxable Supplies: Remember that certain supplies, such as certain financial services, insurance, and exempt sales, are not included in your taxable turnover for VAT registration purposes. Make sure to exclude these from your calculations.

In addition to VAT, you’ll also need to consider other taxes such as income tax and National Insurance contributions on your business profits, depending on your business structure and personal circumstances.

What should I do, if I am registered as VAT, I am charging VAT to the customer and the net revenue is less than the VAT registration threshold (£85,000)?

If you voluntarily register for VAT and your net revenue is below the VAT registration threshold, you are still subject to VAT obligations.

You won’t be required to pay VAT to HMRC unless your VAT taxable turnover exceeds the registration threshold and,
you must remit the collected VAT to HMRC, regardless of whether your turnover exceeds the threshold.

Example:

Let’s suppose you run a small business and is registered for VAT. Every quarter you collect VAT from the customers on sales transactions and your total taxable amount is £50,000. In a quarter, you collected £5,000 VAT from the customers. Then you are required to file VAT returns with HMRC, report the VAT collected from the customers and pay this amount (£5,000) to HMRC. You must pay Net VAT liability amount to HMRC, deducting the amount incurred on the business expenses.

Who should Deregister from VAT?

If the total taxable turnover falls below the deregistration threshold (£83,000), then one may consider deregistering for VAT with HMRC. This would relieve them from the administrative burden of VAT compliance, but you must ensure that you meet the criteria for deregistration.

You should maintain accurate records of her sales, purchases, and VAT transactions to ensure compliance with VAT regulations and facilitate the preparation of VAT returns.

What is the deadline for submitting a VAT Return?

The deadline for submitting a VAT return and paying any VAT due to HMRC depends on the VAT accounting period chosen by the business. In general, the deadline for submitting a VAT return and paying VAT is usually one month and seven days after the end of the VAT accounting period.

For example:

If a business has a quarterly VAT accounting period ending on 31st March, the deadline for submitting the VAT return and paying any VAT due would typically be 7th May.

What you should do if you become insolvent, i.e., insufficient to pay VAT?

Insolvency in the context of VAT refers to a situation where a business is unable to pay its VAT liabilities to HM Revenue & Customs (HMRC) due to financial difficulties or an inability to meet its financial obligations.

You should cancel your VAT registration and organise payment of your outstanding VAT to HMRC.

Businesses can engage in discussions with HMRC to negotiate payment plans or arrangements to settle outstanding VAT liabilities. HMRC may be willing to agree to a time-to-pay arrangement or offer other solutions to help the business manage its VAT debts.
Businesses may be eligible for government support schemes or initiatives designed to assist struggling businesses, such as grants, loans, or tax relief measures. It’s advisable to research and explore available support options that may help alleviate financial difficulties.

HMRC may take action to recover unpaid VAT from an insolvent business through various means, such as issuing demands for payment, pursuing legal action, or appointing a liquidator or administrator to collect assets and settle debts. HMRC may impose penalties and interest charges on the outstanding amounts. These additional charges can exacerbate the financial burden on an insolvent business.

VAT debts must be settled before other creditors can receive payments from the insolvent estate.

You’re still responsible for your VAT if you:

are declared bankrupt and continue to trade.
set up a voluntary arrangement to pay off your debts (sometimes known as a ‘trust deed’ in Scotland)

If you set up a voluntary arrangement, HMRC will send you 2 paper VAT Returns. These are for the following periods:

your current VAT period up to the day before the arrangement
the date of the arrangement up to the end of your next VAT period

After this, you can continue to use your online VAT account to send your VAT Returns.

Taxes on individuals and businesses are levied based on their income. They are collected by the HMRC and used to fund public services and government expenditure. To assess the income tax liability, one must understand the income tax-filing obligations and sources of income of the broad categories of income taxpayers, including individuals, small businesses, large businesses, investors, pensioners, and non-residents.

The UK tax system has different tax bands for each taxpayer category. The below figure depicts the taxpayer categories.

Understanding the type of tax, you need to file is the first step in navigating the UK tax system. Identifying the specific tax type relevant to your circumstances lays the foundation for fulfilling your tax obligations accurately and efficiently.

Tax-Payer and Tax-Type

Before proceeding with any tax-related activities, take the time to determine the appropriate tax type applicable to your situation (click link to article 1) and, complete the required forms, and comply with HM Revenue & Customs (HMRC) regulations.

A detailed description of each tax type applicable under each tax-payer category is provided in this section.

Tax-Payer: Individual

Employees, Self-employed Individuals, Landlords, Company Directors, Investors, Pensioners, High-Earners, and Non-Residents file tax as individuals. The different tax types that they might need to file are:

Income Tax: Individuals typically need to file income tax returns and pay taxes on their earnings from employment, self-employment, rental income, investments, pensions, and other sources of income.
Capital Gains Tax: Individuals may need to report and pay tax on any capital gains made from selling or disposing of assets such as property, investments, and personal possessions.
Inheritance Tax: Individuals may need to plan for and pay inheritance tax on the value of their estate upon their death, depending on the value of their assets and any exemptions or reliefs available.
Council Tax: Individuals who own or occupy residential properties may need to pay council tax to local authorities based on the value of their property.
Value Added Tax (VAT): Individuals who are VAT-registered businesses may need to charge VAT on goods and services provided and submit VAT returns to HMRC.

Tax-Payer: Small Scale Businesses

Self-employed Individuals, Sole Traders, Freelancers, and Small Business Owners file tax as small-scale businesses. The different tax types that they might need to file are:

Income Tax: Sole traders, freelancers, and small business owners typically need to file income tax returns and pay taxes on their business profits.
National Insurance Contributions (NICs): Self-employed individuals may need to pay Class 2 and Class 4 NICs on their self-employed earnings.
Value Added Tax (VAT): Small businesses with taxable turnover above the VAT threshold may need to register for VAT, charge VAT on goods and services provided, and submit VAT returns to HMRC.
Corporation Tax: Small businesses operating as limited companies may need to file corporation tax returns and pay taxes on their profits.

Tax-Payer: Large Scale Businesses

Company Directors, Corporations, Limited Companies, Partnerships (depending on size and structure), Organizations with significant turnovers and complex financial structures file tax as large-scale businesses. The different tax types that they might need to file are:

Corporation Tax: Large corporations and companies need to file corporation tax returns and pay taxes on their profits.
Value Added Tax (VAT): Large businesses may need to register for VAT, charge VAT on goods and services provided, and submit VAT returns to HMRC.
Employment Taxes: Large businesses with employees need to deduct and pay taxes such as Pay As You Earn (PAYE) income tax and National Insurance Contributions (NICs) on their employees’ earnings.
Business Rates: Large businesses with commercial properties may need to pay business rates to local authorities based on the rateable value of their properties.

Tax-Payer: Investors

Individuals or entities earning income from investments such as dividends, interest, or capital gains file tax as investors. The different tax types that they might need to file are:

Income Tax: Investors may need to report and pay taxes on their investment income, including dividends, interest, and rental income.
Capital Gains Tax: Investors may need to report and pay tax on any capital gains made from selling or disposing of investments.

Tax-Payer: Pensioners

Retired individuals receiving income from pensions, annuities, or retirement benefits file tax as pensioners. The different tax types that they might need to file are:

Income Tax: Pensioners may need to report and pay taxes on their pension income, annuities, and other retirement benefits.

Tax-Payer: Non-Residents

Individuals or entities not residing in the UK but earning income from UK sources file tax as non-residents. The different tax types that they might need to file are:

Income Tax: Non-residents earning income from UK sources may need to report and pay taxes on their UK income, including rental income, employment income, and capital gains.
Non-Resident Landlord Scheme: Non-resident landlords renting out UK property may need to register for the Non-Resident Landlord Scheme and have tax deducted at source from their rental income.

Navigating the complexities of income tax can be challenging, especially for businesses and individuals with complex financial arrangements. It is advisable to seek professional advice from qualified accountants or tax advisors to ensure compliance with tax laws and regulations and to optimize tax planning strategies.

Click here to understand the income tax bands, allowances, rates, and how to calculate income tax liability for individuals and businesses.

Understanding Credit Cards in the UK

Best Practices for Using Credit Cards in the UK

1. The VAT Flat Rate Scheme

2. VAT Annual Accounting Scheme

3. Cash Accounting Scheme

4. VAT Margin Schemes

5. VAT Retail Schemes

6. Point of Sale Scheme (PoS):

7. Apportionment Scheme:

8. Direct Calculation Scheme:

Importing Vehicle into the UK

DIY housebuilders’ Scheme

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