What is VAT?
Value Added Tax is charged on most business transactions in the UK. Businesses add VAT to the price they charge when they provide goods and services to:
- business customers – for example a clothing manufacturer adds VAT to the prices they charge a clothes shop
- non-business customers – members of the public or ‘consumers’ – for example a hairdressing salon includes VAT in the prices they charge members of the public
If you’re a VAT-registered business, in most cases you:
- charge V.A.T on the goods and services you provide
- reclaim the V.A.T you pay when you buy goods and services for your business
If you’re not V.A.T-registered then you can’t reclaim it back when you purchase goods and services.
Who charges VAT and what is charged on
VAT-registered businesses add VAT to the sale price of most goods and services they provide.
When you must register for VAT
If you’re a business and the goods or services you provide count as what’s known as ‘taxable supplies’ (see ‘What is VAT charged on’ below) you’ll have to register for VAT if either:
- your turnover for the previous 12 months has gone over a specific limit – called the ‘VAT threshold’ (currently £77,000)
- you think your turnover will soon go over this limit
You can choose to register for VAT if you want, even if you don’t have to.
What is VAT charged on?
If you’re VAT-registered you’ll have to charge VA..T on any goods and services that you provide in the UK that are VAT taxable. You charge VAT on the full sale price, even if you accept goods in part exchange or through barter instead of money.
How VAT is charged and accounted for
If you’re VAT-registered the V.A.T you add to the sale price of your goods or services is called your ‘output tax’. The V.A.T you pay when you buy goods and services for your business is called your ‘input tax’.
Filling in your VAT Return
If you’re VAT-registered you’ll have to submit a VAT Return at regular intervals – usually quarterly – the return shows:
- the VAT you’ve charged on your sales to your customers in the period – known as output tax
- the VAT you’ve paid on your purchases – known as input tax
If the amount of output tax is more than the input tax, then you send the difference to HM Revenue & Customs (HMRC) with your return.
If the input tax is more than your output tax, you claim the difference back from HMRC.
There are special schemes that some businesses can use to help them work out and pay their VAT.
Rates of VAT
There are different rates, depending on the goods or services that are being provided. Currently there are three rates:
- Standard rate 20%
- Reduced rate 5%
- Zero rate 0%
The standard rate is the default rate – this is the rate that’s charged on most goods and services in the UK unless they’re specifically identified as being reduced or zero-rated.
Examples of reduced-rated items
These are some examples of goods and services that may be reduced-rated, depending on the product itself and the circumstances of the sale:
- Domestic fuel and power
- Installing energy-saving materials
- Sanitary hygiene products
- Children’s car seats
This isn’t a complete list of reduced-rated items and services.
Examples of zero-rated items
These are examples of goods and services that may be zero-rated, depending on the product itself and the circumstances of the sale:
- Food – but not meals in restaurants or hot takeaways
- Books and newspapers
- Children’s clothes and shoes
- Public transport