What is VAT?

VAT stands for value added tax and is charged by UK businesses when a qualifying item or service is sold.

HMRC administers and collects UK Value added tax which is added to most goods and services sold in the UK and some from outside the UK.

Every EU member country has their own VAT department which collects value added tax at varying rates.

HMRC VAT rates

There are different VAT rates that apply in the UK. The rates and the types of goods and products in each classification rarely change.

Standard VAT rate

The standard rate of VAT is 20% which was increased from 17.5% in January 2011.

Throughout the EU the standard rate of VAT cannot be set lower than 15%.

Reduced VAT rate

A reduced rate of VAT is applied at 5% for some goods and services like mobility aids for the elderly and electricity for domestic use.

Zero VAT rate

Zero rate tax is applicable to goods like books and the majority of food.

What is exempt from VAT?

To the end user who buys a product or service zero rate and exempt from VAT has the same result of no VAT being charged.

To a business that is selling a good or service there are important differences between VAT exempt and zero rate status.

The big difference for a business is in the type of supply and the treatment necessary for VAT purposes.

A business supplying a VAT exempt good or service is not normally able to reclaim VAT on expenses related to the good or service sold.

This is not the case for a zero rated product where the supplying business can recover the VAT on expenses incurred in providing the good or service.

Some examples of VAT exempt goods and services include:

• Charity fundraising events.
• Betting, gaming, bingo and lottery.
• Home insurance.
• Education and training provided by an eligible body.

What is the VAT threshold?

The VAT threshold relates to the amount of money a business can earn before having to register for VAT.

In the UK the current VAT registration threshold sits at £85,000 which has been in place since 2017.

HMRC can change the VAT registration threshold and will usually announce any amendments in the budget.

If your business has a taxable turnover meeting the VAT threshold you will need to complete the VAT registration process.

After your business has been registered for VAT you will then need to:

• Apply VAT to the eligible goods and services you sell.
• Pay VAT on the goods and services you buy for your business.
• Maintain VAT records as part of your accounts.
• Submit VAT returns to HMRC to show the VAT you have charged and paid out.

Claiming VAT back

A VAT refund is possible for both a business and an individual. For a business any VAT refund will be repaid after your VAT return has been submitted to HMRC. As an individual a VAT refund may be due on products purchased in the UK if you are from outside the EU.

Claiming VAT back for businesses

As a business claiming VAT back is done through the submission of your VAT return.

When HMRC receive your VAT return they will repay any VAT refund you are due by BACS normally within 30 days from when HMRC received your VAT return online.

Claiming VAT back for individuals

To be entitled to VAT back as an individual you must not be resident in the EU.

VAT is not applicable to exports of goods and merchandise outside the EU. This means that most goods and merchandise bought in the UK are classed as exports if purchased by a non EU resident.

If you meet the non EU resident criteria you will be classed as a visitor for VAT refund purposes and can follow a process at the point of leaving (or after you have left) the UK to claim your VAT back.

How to work out VAT

Understanding how to calculate a price for VAT inclusive and VAT exclusive items is helpful for both VAT registered businesses and individuals.

VAT Inclusive Prices:

Standard rate VAT (currently 20%)

(Price – VAT) × 1.2 = price including standard rate VAT

Reduced rate (currently 5%)

(Price – VAT) × 1.05 = price including reduced rate VAT

VAT Exclusive Prices:

Standard rate (currently 20%)

(Price + VAT) ÷ 1.2 = price excluding standard rate VAT

Reduced rate (currently 5%)

(Priced + VAT) ÷ 1.05 = price excluding reduced rate VAT

VAT Registration

Registering for VAT can be done for a number reasons and is not always compulsory. HMRC needs you to register a business when appropriate in the required timescales to avoid penalties.

Compulsory VAT registration

• A business has to register for VAT if the taxable turnover exceeds £90,000 in any consecutive twelve month period.
• You also need to register if you expect your turnover to exceed the VAT threshold within 30 days.
• If you or your business are based outside the UK and supply goods or services to the UK you must register for VAT even if your business does not meet the VAT taxable turnover threshold.

A failure to register for VAT on time can result in penalties for failure to notify and if your business owes HMRC VAT surcharges and interest can be added for late payment.

Voluntary VAT registration

Voluntarily registering for VAT can be done and is an option worth considering.

Two common reasons for a business to register on a voluntary basis are:

• Smaller businesses can gain some benefit from appearing more established because they are VAT registered. In addition it has been known that certain suppliers and organisations will only do business with other VAT registered businesses.
• You may be due a VAT refund in some cases for example if you sell a zero rated product you can reclaim the VAT (that you have paid at standard rate) that your business paid out on qualifying costs.

In some circumstances HMRC also lets you voluntarily deregister for VAT which is an option worth taking into account for some businesses.

VAT number

When you have registered for VAT with HMRC you will be given a VAT number which in the UK will start with the letters GB followed by nine numbers.

Your VAT number will be included in your VAT registration certificate and must be used on all invoices.

You can check a VAT number by using the online service provided by GOV.uk which lets you check the validity of a UK VAT registration number and the name and address of the company the VAT number is linked to.

VAT Accounting schemes

How VAT is applied can depend on the type of VAT scheme your business is registered for.

There are number of VAT schemes with different rules, eligibility and reporting responsibilities.

Which scheme is best for your business depends on your taxable income and how you operate.

Making the right choice for your business can assist with improved cash flow and generally make the process simpler.

Standard VAT accounting

The most common method of reporting VAT and needs you to keep records of all of your sales and purchases.

VAT flat rate scheme

Available to businesses with a turnover of less than £150,000 and lets you work out VAT owed as a percentage of your turnover. Under the VAT flat rate scheme the percentage of VAT applied depends on the type of industry your business is in.

VAT cash accounting scheme

Available to businesses with an estimated taxable turnover of less than £1.35 million. This scheme lets you pay VAT on a sale after you have been paid and not before.

VAT annual accounting scheme

Available to businesses with an estimated taxable turnover of less than £1.35 million. The annual accounting scheme allows you to pay only one VAT bill instead of quarterly.

VAT retail scheme

A VAT retail scheme can be used in conjunction with other VAT schemes. There are three main VAT retail schemes called point of sale scheme, apportionment scheme and the direct calculation scheme.

VAT margin scheme

The VAT margin scheme can be a good option for second hand good sellers. The margin scheme allows for the difference between an item purchase and sales price to be taxed only instead of the full selling price.

Making Tax Digital for VAT

Making tax digital for VAT is something all VAT registered businesses qualify for unless they are exempt.

The MTD for VAT regime brings in all digital regime from record keeping to VAT return submissions to HMRC.

Complying in full to the MTD for VAT rules is a must to avoid VAT penalties for late filing and payment.

You can find out more about what MTD for VAT means for your business and what you need to do to meet the MTD requirements in our MTD for VAT online guide.