VAT Terminology
Definitions:
- Input Tax – vat you incur on expenses – not all expenses have vat on them, and VAT applies only when you buy from a vat registered business.
- Output Tax – vat you charge to your customers – this may be explicit eg £100+vat = £120 (Net £100, Vat £20, Gross £120) or implicit, eg Retail Price £120 = £100 net and £20 Vat. Note its the net that becomes your turnover for self assessment / business accounts, in both cases £100.
- VAT return – a quarterly return made to HMRC, with a payment. At its simplest its Output Tax on sales less Input Tax on expenses and you pay the difference over to HMRC or claim an excess of Input Tax back (if you regularly have an excess of Input Tax you may be running at a loss). These must be done online via the Making Tax Digital service.
- Annual Accounting – an optional scheme to do one vat return a year instead of quarterly.
- Standard Rated Items – these are sales or purchases with 20% vat on them.
- Zero Rated Items – these are transactions within the scope of VAT but where the vat rate is 0%.
- Reduced Rate Items – normally 5% on domestic electric and gas.
- Exempt Items – outside the scope of vat. How does that differ from Zero rate? Well if your sales are zero rated, you still have to register and report for vat, but there is nothing to pay, and you can claim Input Tax back. If your sales are exempt, you don’t have to register for vat and you cannot claim input tax back.
- Invoice Basis – VAT is accounted for based on date of transaction rather than the date paid or received – eg an invoice dated 1 March paid on 1 May counts for vat as 1 March.
- Cash Basis – VAT is accounted for based on when a payment is made or received – eg an invoice dated 1 March paid on 1 May counts for vat as 1 May. Cash basis tends to be simplest and easiest for most small business. See our separate guidance on Accruals Accounting, Cash Accounting, Simplified Accounting
VAT Registration Basics
VAT is a turnover based tax rather than profits based such as Income Tax, Corporation Tax or NI.
If your business turnover is less than £90,000 (2024/25) a year then it doesn’t apply – this will take many Yoga Businesses outside of VAT.
VAT Cliff Edge
Be aware of the “cliff edge” effect of VAT, in other words if your turnover is £89,999 no vat is due, if its £90,001 then you pay VAT on everything.
As an extreme example, if your turnover is £89k you pay no VAT. If your turnover is £91,000, you pay £15,166. If you do go over the VAT threshold the break even turnover is £108,000.
What is VAT due on?
Business income for VAT is:
- Class fees
- Workshop fees
- Income from retreats (Tour Operators Margin Scheme may apply – its beyond the scope of this guide, but we can talk you through it)
- Selling digital media (Beware of special rules if you sell digital services into the EU – the £85k registration threshold does not apply)
- Fees from teacher trainings
- Class fees earned by teachers you employ
- Rent from others using your space (NB long leases of premises with exclusive use may be outside of vat. A typical letting within a studio to another yoga teacher or similar will be within vat)
Fees from studios, gyms, local authorities, etc, where you are on payroll / PAYE do not count.
Sometimes its suggested Yoga teaching should be exempt from VAT as an educational service. Alas this has been through the VAT Tribunals, and the ruling is the education exemption doesn’t apply to yoga – this is because the education exemption for VAT applies to topics normally taught in schools, colleges and universities, and its deemed that yoga doesn’t fit into the “normally” definition (S Tranter t/a Dynamic Yoga (TC4071)).
If you sell digital media online, eg downloads, streaming, to customers in the EU then special rules apply – read about these
VAT can seem arbitrary and unfair in its burden on small businesses – this apparent unfairness of VAT can be explained by its name – its a tax on value added by businesses, and its intended to be borne by consumers. In a simplistic world if you reach the VAT threshold, you simply charge your customers 20% more so you are no worse off and the customers bear the costs. However this creates a clear pricing distortion – the end retail customer doesn’t differentiate between charges with and without VAT, so if you are charging £10+VAT a class = £12, and the studio over the road only £10 with no VAT (as they are below the threshold), then your studio appears that much more expensive. Your choice is to be that much more expensive, and maybe lose custom, or drop your price to £8.33 + VAT which means your customer still pays £10 but you are worse off due to bearing the VAT.
Flat Rate Scheme
A simplified form of VAT called the Flat Rate Scheme exists, and this may be of interest to many Yoga businesses coming into the VAT net. From April 2017 the “simplification” has been made more complex by so called “low cost trader” rules to prevent perceived abuse of the scheme.
Unless you have a retail operation such as shop or café appended to a studio, or a certain threshold of costs, eg high power costs in a Hot Yoga Studio,. then most yoga teaching businesses would probably be caught by these new rules and ineligible to use Flat Rate VAT.
VAT Mitigation
Because of the retail nature (supplying direct to the public) of yoga classes, VAT registration can be a large economic burden for a small studio or successful teache.
We’ve got a few suggestions for VAT Mitigation in this separate section of our website.
Quarterly Cycle
The general cycle is that each quarter you:
- Add up sales and calculate Output Tax
- Add up expenses and calculate Input Tax
- Calculate the difference
- Submit your vat return via Making Tax Digital compliant software
- Pay the difference if Output Tax exceeds Input Tax, or claim the difference back if vice verse
If you are using the Flat Rate Scheme then things are a little different.
