Introduction of VAT
VAT tax came into existence in 1973 in UK and it is the third major source of government funding after income tax and national insurance. It is a kind of consumption tax. Let us see what consumption tax is. Consumption tax becomes applicable when one purchases good and services. The term consumption tax can be used to describe the taxing system as a whole where the people are taxed on the basis of how much they consume and not on how much they add to the economy. The latter is income tax. Goods that are exported and services that are sold to customers who are abroad are generally kept outside the ambit of VAT. On the other hand imports are kept within the scope of VAT to make sure that the EU producers can compete on equal terms with suppliers who are outside the EU.
If the annual turnover of a person is less than the threshold limit then depending upon the rules of the member states the person does not have to charge VAT on their sales. You will need to register for VAT with HMRC if the total VAT taxable turnover is greater than 85000 pounds. VAT taxable turnover is the total sales excluding anything that is exempt from VAT. When you register you will get a VAT registration certificate. You can voluntarily register even if your turnover is less than 85000 pounds unless the whole of your sales is exempt. Moving on to registration for distance selling in the UK. The threshold in this case is 70,000 pounds. Let me now guide you as to what is called distance selling. Distance selling means that you are selling into UK while being outside UK but within EU. It is also distance selling into UK if you sell goods to customers who are in UK or Isle of Man and the customers are not VAT registered. You are distance selling whether you deliver the goods yourself or arrange for their delivery. The threshold in case of registration for bringing goods into the UK from EU is more than 85,000 pounds. In this case you will not have to pay import duty and you do not need an import license. These imports which take place within the EU are called acquisitions. But you will need a commodity code which will help you file declarations and get other paper work done. The commodity code also helps you check if any due needs to be paid and if any duty reliefs are needed. In case your VAT taxable turnover falls below the de-registration threshold of 83,000 pounds then ask HMRC to cancel your registration. You should apply for cancellation within 30 days of when you stop being eligible or a penalty will be charged. You stop being eligible when you stop trading or stop making VAT taxable supplies or when you join a VAT group. If you have a VAT registered business in UK which supplies goods and services to VAT registered customers in another EU country then you must inform HMRC about the same. You should then use an EC sales list to show the details of every EU customer, the country code of the customer and the value of supplies made.
Thresholds to join and leave particular VAT schemes
The threshold to join the Flat Rate scheme is 150,000 pounds or less and the threshold to leave this scheme is more than 230,000 pounds. For joining the cash accounting scheme the threshold is 1.35 million or less and for leaving the scheme the threshold is 1.6 million pounds. For annual accounting scheme the joining threshold is 1.35 million pounds or less and for leaving the threshold is more than 1.6million pounds.