VAT is an acronym for the term value-added tax and is also referred to as goods and services tax in various countries. It is a type of tax that is calculated by a professional in a step-by-step manner. VAT is charged on the price of a product or service starting from the production line till it reaches the user. It is regarded as an indirect tax because business collects it from the consumers rather than the government. VAT on business energy is often charged at 20%.
VAT is charged on several goods and services, including:
- Selling business assets
- Stuff that is sold to the staff like meals in the cafeteria
- Business goods that are bought for personal uses
- Sometimes loaning goods are also charged
All the above-mentioned items are referred to as taxable supplies. For B2B supplies, the VAT is mentioned above the price, whereas for B2C supplies, it is included within the price.
What Are Different VAT Rates?
The very first factor you must consider after you have registered as a VAT business is to identify the VAT rate for the products and services you offer. This way, you can charge it accurately and regain any of it for the purchase your business might make.
There are three different VAT rates used currently, and the rate you apply will depend on the services and products you offer to consumers. This rate of VAT is added to the cost of services and goods you sell, be it to non-business or business customers.
The three rates are:
- Standard Rate
- Reduced Rate
- Zero Rate
The standard rate of VAT applied on most of the goods and services in various countries is set at 20%. Anything that is considered to be a luxury item will also be charged at this rate. This is the very reason products like confectionery and ice creams use the standard rate.
The reduced VAT rate is applied to only some specific products. The value of the reduced rate is set at 5% along with the price. It is often applied to products like domestic power and fuel and to children’s car seats.
The last type of VAT rate is the zero rate that is a bare minimum VAT applied to basic products like books, kids’ clothes, food, etc. Anything that is considered essential and important by the government is included in this category.
Along with this, products that are supplied to VAT-registered businesses also fall in the zero-rate category. Even if there is no rate added to the product, the business must record every transaction of these products and record it on their VAT report.
Where Should I Keep My VAT Records?
There are several methods of keeping a record of when, where, and how much VAT you paid. You can record it manually on paper, on your computer, or design a special program that will keep a record for your business.
The most beneficial method is to record them digitally. This way, in case you lost an invoice, or the amount cannot be fetched, you can simply ask the person managing the records to search it on the computer.