If you own a business in the UK, then you’re no doubt familiar with VAT (value added tax). VAT is a type of consumption tax that’s levied on the estimated market value of a product or material at every stage of its production. VAT is implemented under the assumption that a business owes some amount of tax on its products or services, less any taxes that may already have been paid. Assuming a fictitious VAT rate of 10% to illustrate, a business would pay 10% of the price of its products minus any taxes previously paid. So, a product selling for £10 would carry with it a 1% VAT of £1. VAT is levied at every stage of a product’s production on every entity that contributes to the process.How VAT is ManagedTypically, UK businesses are registered to collect VAT on behalf of the government in a timely and truthful manner. The monies must be submitted with an accurate accounting of all the amounts collected. HMRC (Her Majesty’s Revenue and Customs) pays close attention to the VAT system and has a system of heavy penalties for non-compliance. HMRC also does not accept a plea of ignorance of the VAT regulations as an excuse for not paying all sums due. Here’s some further information about VATWhat are Input and Output VATs?An input VAT is the tax charged on the goods and services a business purchases. An output VAT is the tax collected from a business’s customers. This tax must be collected in good faith and regularly paid over to HMRC. Underlying both taxes is the idea that there is a supply of goods and services in the UK made by persons or companies in the normal course of conducting business activities. It’s important to note, though, that some input VAT can be deducted from the output VAT an entity owes. Only certain categories of input VAT are allowed for this deduction and there are significant disallowances, such as business cars and business entertainment.Points to Consider Regarding VATA standard rate of 17.5% applies to taxable supplies. Some supplies, however, are zero rated. There also may be a reduced rate of 5% that applies to a few specific taxable supplies. It’s best to check with an accountant to determine the applicability of these rates to your particular situation, especially regarding some types of supplies that are classified as exempt (non-taxable). There also is a difference between zero rated and exempt supplies. For companies that make exempt supplies, it is not possible to recover any input tax. For companies that make zero rated supplies, recovery of input tax is allowed. Please remember that you are required to hold a valid VAT registration if the value of your taxable supplies exceeds a specific annual amount, which currently is £70.000. If your annual income is less than £70,000, you can opt for voluntary registration, which then would allow you to recover input VAT you have paid.It is highly recommended that you engage an accounting professional who fully understands how the VAT applies to your individual financial situation.