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1. VAT is a tax on sales of goods and services. It is not a tax on profit.

2. If your business turnover is more than £56,000 a year (This threshold is valid for the 2002-03 tax year. Check hmce.gov.uk/forms for any changes) you will have to register with Customs and Excise as a Value Added Tax (VAT) vendor.

3. Most VAT -registered businesses must add the standard rate of VAT to the value of their products and services when they are sold.

4. Goods and services (supplies) are divided into four categories for VAT purposes.

5. The standard rate of VAT is currently 17.5%. This covers all those goods and services that are not exempt, zero or reduced rated.

6. The reduced rate (5%) is charged on domestic fuel and power as well as domestic energy saving products. The conversion and renovation of certain buildings is also subject to the reduced rate.

7. The zero rate (0%) applies to specified categories of goods including children's clothes and shoes; books; newspapers; most food (but not meals in restaurants or hot take-away food and drink); exported goods and most public transport services.

8. Exempt products and services include; insurance; providing credit; certain types of education and training; certain services from doctors and dentists; selling, leasing or letting land and buildings (but not garages, parking spaces or hotel and holiday accommodation)

9. The consumer pays the full amount of the tax but - at each stage up to that point- businesses handling the goods pay input tax to their suppliers and collect output tax from their customers.

10. The principle of VAT can be summarised in three steps:

a) You buy supplies at a price including input tax.
b) You sell goods and services at a price including output tax (VAT)
c) You deduct the input tax from the output tax and pay the difference to Customs and Excise (or receive a refund if the input tax exceeds the output tax)

11. It is the 'taxable person' that is liable for VAT not the business. So if you have more than one business venture and if, between them, their taxable turnover exceeds the limits set down, you must register for VAT.

12. Registration is easy. You simply complete Form VAT 1 and send to Customs and Excise within 30 days from the end of the month when taxable supplies reach £55 000, or within 30 days from the date when it became clear that taxable supplies would exceed the annual limit. Form VAT 1 is available from the Customs and Excise website.

Do's & Don'ts:

Do:

Invite the VAT office to visit your business. They will review your personal circumstances and ensure you have a system in place for recording your VAT.

If you have queries use the Customs and Excise website (see above), or else use the VAT enquiry line on 0845 010 9000.

Do keep accounting records for six years in case the VAT inspectors decide to audit you.

Don’t:

Don’t delay your registration. You cannot charge VAT without a registration number but you will be assessed the moment your turnover reaches the threshold.

Don’t fall behind in your VAT payments - it becomes expensive! Consider setting aside the VAT from your customers as you receive it, so you know it is available to pay over when it is due.

Don’t ignore Customs and Excise reminders - they won’t go away!