Value Added Tax (VAT) is levied on almost all business transactions in the UK – whether for goods or services – and must be charged at the ‘point of sale’. It was adopted in 1973 in preference to purchase taxes or sales taxes, partly to harmonise with the Common Market (now the EU) and partly to make the tax easier to collect and the paperwork easier to audit.
VAT is called an “indirect tax” because the people who are ultimately paying it are not the ones who actually send it to the government (via HM Revenue and Customs). There can be a chain of people adding VAT in proportion to the value they add to the final product that the end customer eventually pays for. VAT is simple in principle. You just add a percentage onto your invoices but the number of businesses that miscalculate how much they owe is considerable. Whether you overpay or underpay a VAT instalment, it can be a disaster – for your cash-flow, your competitive pricing or for customer relations. You can also end up paying fines.
There are two reasons for using an online VAT calculator in the UK. The first is to make a quick calculation of the VAT you will have to pay or charge on particular products. Using a VAT calculator online means all you need is your mobile phone and you can use it wherever you are; in a meeting, at a shop or with your customer. The second is the reverse – to remove the VAT so you can see the product’s raw price. This is often essential so that you can compare competitors or wholesale prices, or to check that your own VAT has been correctly calculated. A UK VAT calculator usually lets you do this.
Using a VAT calculator UK
Not all countries apply VAT and even in the UK the rate can vary, so before you use a VAT UK calculator you should check the VAT rate that applies to the particular goods or service you are evaluating. The standard UK rate in 2022 is 20% but there are reductions and exemptions for certain goods and also for certain kinds of customer (for example, certain disabilities). Many of the exempt goods and services are surprising at first sight: the list includes financial services and investments, parking spaces and houseboat moorings, land and property sales, training and educational courses, healthcare, funeral plans, antiques, sports events, children’s clothes and lottery tickets. A full list is on the government website .
A few items (including children’s car seats) pay just 5%. This reduced rate also applied in the hospitality and holiday industries during the recent coronavirus lockdowns (until 30th September 2021 and then 12.5% until 1st April 2022 ).
Ways to budget
Most businesses make quarterly VAT returns to HMRC but there are alternative methods. Most of them are intended to help businesses manage their cash-flow better rather than to change the amount of tax they eventually pay.
One popular variation is the ‘cash accounting scheme’ which allows businesses to calculate their liability based on actual payments in and out of the business instead of on issued and received invoices. Many companies whose business is seasonal prefer to file a VAT return just once per year, usually along with Corporation Tax. Another method popular with small businesses is the ‘flat rate scheme’ which allows you to pay a set percentage of your total turnover instead of logging every transaction individually.
Whichever schedule you adopt, you should agree it in advance with HMRC. Always keep meticulous records of both sales and purchases and the VAT you paid or charged. Record keeping can be labour intensive but there are now many software solutions to make life easier, starting, of course, with a simple online VAT calculator. Another way to make life easier is to issue employees with fuel and expenses cards that automatically log expenditures into your accounting software. Most also offer cost savings and you can find the best on offer by using our price comparison site.