VAT is a tax that is charged on some goods and services. You may have to register for VAT with HM Revenue & Customs if your turnover is more than £77,000 per year.
Overview
VAT is a tax that's charged on most goods and services that
VAT-registered businesses provide in the UK. It's also charged on
goods and some services that are imported from countries outside
the European Union (EU), and brought into the UK from other EU
countries.
VAT is charged when a VAT-registered business sells to either
another business or to a non-business customer.
When a VAT-registered business buys goods or services they can
generally reclaim the VAT they have paid.
Charging VAT
VAT-registered businesses add VAT to the sale price of most
goods and services they provide.
When you must register for VAT
You may 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 VAT 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 VAT you add to the sale price of
your goods or services is called your 'output tax'. The VAT 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 - and send it to HM Revenue
& Customs (HMRC). The return shows:
the VAT you have charged on your sales to your customers in the
period - known as output tax
the VAT you have 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 HMRC with your return.
If the input tax is more than your output tax, you claim the
difference back from HMRC.
VAT rates
There are different VAT rates, depending on the goods or
services that are being provided. Currently there are three
rates:
standard rate - 20 per cent
reduced rate - 5 per cent
zero rate - 0 per cent
Reduced-rated items
Goods and services that may be reduced-rated include:
domestic fuel and power
installing energy-saving materials
sanitary hygiene products
children's car seats
Zero-rated items
If you sell zero-rated goods or services, they count as taxable
supplies, but you don't add any VAT to your selling price because
the VAT rate is 0 per cent.
Goods and services that may be zero-rated include:
food - but not meals in restaurants or hot takeaways
books and newspapers
children's clothes and shoes
public transport
Exempt items
Some items are exempt from VAT, including:
insurance
providing credit
education and training, if certain conditions are met
fundraising events by charities, if certain conditions are
met
membership subscriptions, if certain conditions are met
most services provided by doctors and dentists
Selling, leasing and letting of commercial land and buildings
are also exempt from VAT.
But you can choose to give up the right to the exemption and to
charge VAT at the standard rate instead. This allows you to reclaim
input tax when otherwise you wouldn't be able to.
Outside the scope of VAT
There are some things that aren't in the UK VAT system at all -
they're outside the scope of VAT. These include:
non-business activities like a hobby - for example, you might
sell some stamps from your collection
fees that are fixed by law - known as 'statutory fees' - for
example the congestion charge or vehicle MOT tests
