Introduction - VAT for SMEs

It sometimes comes as a surprise when you realise that, in the eyes of HMRC, you are a tax collector. A VAT collector to be more precise. In the main, the two things you need to get right are the VAT required on your invoices (ie how much VAT to charge your customers) and then the Calculate a VAT Return (ie which states how much you owe to HMRC).

If you want to challenge whether you ought to be registered (ie really be a tax collector) then that is covered in VAT Registration.

The first two concepts to understand are the VAT chain and HMRCs VAT calendar. The rate of VAT payable, and the concept of exempt supplies are covered later on.

The VAT chain explains how VAT flows from one business to another as goods and services are bought and sold. At each stage, VAT might be charged and paid. While I had a vague idea of how this should work, I needed to be clear when I set up a business. The VAT chain therefore helps identify who is liable for what amount of VAT within a business.

HMRCs VAT calendar explains when your business becomes liable to tell HMRC what VAT you have paid and collected (ie when you need to submit your  VAT return). It also explains when you need to pay the VAT to HMRC. The key point here is that you may end up paying VAT before you have collected it from your customers. The calendar explains how that might happen. The rest of the description explains possible solutions to that cash flow challenge.

The third concept appears to be blindingly obvious - what goods and services are covered by VAT? Guildlines for this are given.

Finally, the overriding aim with VAT, is to collect a tax on non-essential goods collected by persons that are selling to final consumers. These final consumers bear the tax. Keep that in mind as it explains the underlying “logic” of the VAT system.