Value Added Tax (VAT), is a form of tax which is charged on most business to business and consumer transactions in the UK.
VAT is charged on goods and most services.
There are three different rates of VAT:
The above apply to different types of goods and services. Some goods and services are exempt from VAT. Whilst others may be out of the scope (OS).
Vat registered businesses normally prepare there VAT on a quarterly basis by completing a form otherwise known as a VAT return and send it to HM Revenue & Customs.
The information below helps explain some of the basics of how VAT works.
If you are VAT registered business, VAT is a tax added to the net value of your products or services.
You must register for VAT if your turnover for the previous 12 months is over £67,000 or if you think your turnover may go over the limit. You may register voluntarily at any time. There are a few exemptions from registration.
How is the VAT calculated and accounted for?
If you are registered for VAT generally you charge VAT on your sales and reclaim VAT on your purchases.
The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT that you must pay to HMRC.
If the value of the VAT you reclaim is more than the value of the VAT you charge, then you will be entitled to a refund.
If you are not registered for VAT, you must not charge VAT on your sales but like all non vat registered businesses you will pay VAT on your purchases for which you cannot reclaim back
If the input tax you reclaim is more than your output tax, you will be due a refund and can reclaim the difference from HMRC.
Vat Rates
Different VAT rates apply to different goods and services. There are currently three rates:
- Standard Rate @ 17.5 per cent
- Reduced Rate @ 5 per cent
- Zero Rate @ 0 per cent
The standard rate of VAT is the default rate for goods and services unless specified otherwise.
Some Examples of reduced rate items include:
- Domestic fuel and power
- Installation of energy-saving materials
- Residential conversions.
Some Examples of zero-rated items include:
- food - but not meals in restaurants or hot takeaways
- books and newspapers
- children's clothing and shoes
- public transport
Alongside the above there are also exempt items. Items exempted from VAT include the following:
Insurance
- providing credit
- education and training, if certain conditions are met
- fund-raising events by charities, if certain conditions are met
- subscriptions to membership organizations Selling, leasing and letting of commercial land and buildings are also exempt from VAT.
You may elect to waive this exemption and choose to apply VAT at the standard rate, which is called opting to tax.
Items which fall outside the scope of VAT include:
- non-business items such as income from a hobby, or
- statutory fees such as an MOT test supplied directly by a test centre to its customer.
The difference between exempt and zero-rated
If you sell zero-rated goods or services, they are taxable for VAT at 0%.
If you sell exempt goods or services they are not taxable for VAT.
Unlike zero-rated supplies, exempt items are not treated as taxable. No tax is payable, but equally, the person making the supply cannot normally recover any of the VAT on their own expenses.
If you sell only exempt goods or services, generally you cannot register for VAT or reclaim VAT on purchases. If you sell some exempt goods or services, you may not be able to reclaim VAT on some purchases.
If you sell only zero-rated goods or services you may apply for exemption from VAT registration. If you pay little or no VAT on your purchases this would probably make sense.
