Value Added Tax

Your questions answered

Value Added Tax, or VAT, is a tax charged on most business-to-business and business-to-consumer transactions in the UK. VAT is also charged on goods, and some services, imported from places outside the European Union (EU) and on goods and some services coming into the UK from other EU countries.

VAT is charged to a buyer by a VAT registered seller. This VAT is reclaimed by a VAT registered buyer after goods and services are purchased.

There are three different rates of VAT, standard, reduced and zero. These apply to different types of goods and services. Some goods and services are exempt from VAT, while others are outside the scope of VAT. Businesses registered for VAT usually account for VAT on a quarterly basis by filling in a VAT return and submitting it to HM Revenue & Customs (HMRC).

Q: What is VAT?
A:
VAT is a tax charged on most business-to-business and business-to-consumer transactions in the UK.
If you are VAT registered business, VAT is a tax on the net value added to your products or services - the difference between the value of your sales and the value of your purchases.

If you are a non VAT registered businesses or organisation, or a consumer, VAT is a tax on your consumption.

Q: Who charges VAT and what VAT is charged on?
A:
You must register for VAT if your turnover for the previous 12 months is over a specific limit - currently £67,000 - or if you think your turnover may soon go over this limit. You may register voluntarily at any time. There are a few exemptions from registration.

VAT is charged by someone who is registered for VAT, a 'taxable person,' on:

goods and services sold or otherwise supplied in the UK
goods, and some services, imported from places outside the EU
goods and services coming into the UK from other EU countries

Q: How is VAT charged and accounted for?
A:
For items which are standard rated or reduced rated for VAT, VAT is charged to the buyer (output tax) by the VAT registered seller. This VAT is reclaimed by the VAT registered buyer (input tax) after goods and services are purchased.

If you are registered for VAT generally you charge VAT on your business sales and reclaim VAT on your business purchases. The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT you must pay to HMRC. If the value of the VAT you reclaim is more than the value of the VAT you charge, then HMRC pays you.

If you are not registered for VAT, you do not charge VAT on your sales. You still pay VAT on your purchases and you cannot reclaim this VAT.

You usually account for VAT on a quarterly basis by filling in a VAT return and submitting it to HMRC. You then pay HMRC the excess of your output tax over the VAT you can reclaim as input tax. If the input tax you can reclaim is more than your output tax, you can reclaim the difference from HMRC.

Q: What are the current rates of VAT that apply?
A:
Different VAT rates apply to different goods and services. Currently there are 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.

Examples of reduced rate items include:

domestic fuel and power
installation of energy-saving materials
residential conversions
children's car seats
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

Q: Are there any items which are not covered by VAT?
A:
Some items are not covered by VAT, exempt items and items which are outside the scope of VAT.

Items which are exempt 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 organisations

Selling, leasing and letting of commercial land and buildings are also exempt from VAT. However you may elect to waive this exemption and choose to apply VAT at the standard rate. This is known as 'opting to tax'.
Items which are 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.

Q: What is the difference between exempt and zero-rated?
A:
If you sell zero-rated goods or services, they are taxable for VAT at 0 per cent.

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.

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