Value Added Tax (VAT) is a tax on goods and services in the UK. If you’re a business owner, it’s important to understand how VAT works and how to comply with the regulations. This guide covers everything you need to know about UK VAT, including registration, rates, and filing requirements.

WHAT IS VAT AND WHO NEEDS TO REGISTER?​

WHY IS VAT CHARGED?​

The UK government adds Value Added Tax (VAT) to goods and services as a way to generate revenue for public spending. VAT is a tax on the value added to a product or service at each stage of its production or distribution. It is essentially a consumption tax that is paid by the end consumer.

The VAT system works by businesses charging VAT on the goods and services they sell, and then reclaiming the VAT they have paid on their own purchases. This means that VAT is effectively a tax on the final consumer, as the amount of VAT paid at each stage of production or distribution is passed on to the next buyer until it reaches the end consumer.

Who needs to register for VAT?

If you are a business owner and your annual turnover exceeds the VAT threshold (currently £85,000), you are required to register for VAT with HM Revenue and Customs (HMRC). However, you can also choose to register voluntarily if your turnover is below the threshold. Once registered, you will need to charge VAT on your sales and pay VAT on your purchases, and file regular VAT returns with HMRC.

Different types of VAT rates and when to charge them.

In the UK, there are three main rates of Value Added Tax (VAT) that apply to goods and services, as well as a number of VAT exemptions and reduced rates.

Summary of VAT rates and VAT-exempt goods and services; london accountant

Standard rate

The standard rate of Value Added Tax (VAT) in the UK is currently 20%. This means that for most goods and services sold in the UK, the VAT charged will be 20% of the sale price.

The standard rate of VAT applies to most goods and services, with a few exceptions that are either exempt from VAT or subject to reduced rates. Some examples of goods and services that are subject to the standard rate of VAT include:

  • Electronic goods such as televisions and computers
  • Clothing and footwear, except for children’s clothing and footwear which are zero-rated
  • Vehicles and fuel
  • Alcohol, tobacco, and soft drinks
  • Most services, such as legal and accounting services, advertising, and consultancy services

When a business is registered for VAT, they are required to charge VAT on their sales at the appropriate rate, which in most cases will be the standard rate of 20%. The business must then declare the VAT they have charged on their sales to HM Revenue & Customs (HMRC), usually on a quarterly basis.

If the business has incurred VAT on their own purchases, they can reclaim this input tax against the VAT they have charged on their sales. This means that the business effectively only pays VAT on the value they have added to the product or service they are selling.

The standard rate of VAT can have an impact on consumer behaviour, as it increases the cost of goods and services for consumers. Businesses may also need to adjust their pricing to account for the VAT they are charging. The standard rate of VAT is reviewed periodically by the government, and may be adjusted in response to economic conditions or other factors.

Reduced rate

The reduced rate of Value Added Tax (VAT) in the UK is a rate of 5% charged on certain goods and services. This reduced rate is lower than the standard rate of VAT, which is currently set at 20%.

The reduced rate of VAT applies to a specific list of goods and services, which include:

  • Domestic fuel and power, such as gas and electricity used in a home
  • Children’s car seats and booster cushions
  • Mobility aids for the elderly and disabled, such as wheelchairs and stairlifts
  • Sanitary products, such as tampons and sanitary towels
  • Energy-saving materials, such as insulation and solar panels
  • Certain types of renovations and repairs to private residences

Businesses that sell goods or services that are subject to the reduced rate of VAT are still required to register for VAT if their taxable turnover exceeds the VAT registration threshold. This means that they will need to account for the VAT they charge on their sales, but at a lower rate than the standard rate of VAT.

If a business is registered for VAT and they sell goods or services that are subject to the reduced rate of VAT, they can still reclaim the input tax they have paid on their own purchases. This means that they can offset the VAT they have paid against the VAT they have charged, resulting in a lower overall VAT liability.

The reduced rate of VAT can have an impact on consumer behaviour, as it reduces the cost of certain goods and services. For example, the reduced rate of VAT on sanitary products makes these items more affordable for consumers.

It’s important to note that the government can change the goods and services that are subject to the reduced rate of VAT, and that businesses should regularly check whether their products and services still qualify for the reduced rate.

Zero rate

The zero rate of Value Added Tax (VAT) in the UK is a rate of 0% charged on certain goods and services. This means that these goods and services are still subject to VAT, but the rate of VAT charged on them is set at 0%. This differs from exempt goods and services which are not subject to VAT at all.

The zero rate of VAT applies to a range of goods and services, including but not limited to:

  • Food and drink, including most groceries, milk, bread, and fruit and vegetables.
  • Books, newspapers, and magazines
  • Children’s clothing and footwear
  • Some medical equipment and supplies
  • Some services related to international travel, such as flights and hotel accommodation

Businesses that sell goods or services that are subject to the zero rate of VAT are still required to register for VAT if their taxable turnover exceeds the VAT registration threshold. This means that they will need to account for the VAT they charge on their sales, even though the rate is 0%.

If a business is registered for VAT and they sell goods or services that are subject to the zero rate of VAT, they can still reclaim the input tax they have paid on their own purchases. This means that they can offset the VAT they have paid against the VAT they have charged, resulting in a lower overall VAT liability.

The zero rate of VAT can have an impact on consumer behavior, as it reduces the cost of certain goods and services. For example, the zero rate of VAT on children’s clothing and footwear makes these items more affordable for families.

It’s important to note that the government can change the goods and services that are subject to the zero rate of VAT, and that businesses should regularly check whether their products and services still qualify for the zero rate.

Which goods and services are exempt from VAT?

The following are examples of VAT exempt items, which do not need to be added to your total VAT taxable turnover:

  • Financial services, including investments and insurance.
  • Garages, parking spaces and even houseboat moorings.
  • Education and training.
  • Property, land, and buildings.
  • Healthcare.
  • Funeral plans.
  • Charity events.
  • Antiques.
  • Gambling.
  • Sports activities.
  • Get the full list here.

VAT returns and deadlines for filing: Annual vs. Quarterly

As a VAT-registered business owner in the UK, you are required to file VAT returns with HM Revenue and Customs (HMRC) on a regular basis. The frequency of your VAT returns will depend on the size of your business and the amount of VAT you are liable to pay.

Generally, businesses with a turnover of less than £85,000 can file VAT returns annually, while those with a turnover of more than £85,000 must file returns quarterly. It’s important to keep track of your VAT deadlines and ensure you file your returns on time to avoid penalties and interest charges. The deadline for filing and paying your VAT is usually one month and seven days after the end of your VAT period.

Annual VAT Returns

In the UK, businesses that are registered for Value Added Tax (VAT) are required to submit an Annual VAT Return in addition to their quarterly VAT returns.

The Annual VAT Return is a summary of the business’s VAT records for the entire VAT accounting year, which runs from the start of the business’s VAT registration date to the end of the 12th month. The Annual VAT Return is due within two months and 10 days of the end of the VAT accounting year.

The Annual VAT Return includes the following information:

  • Total VAT charged on sales made during the VAT accounting year
  • Total VAT paid on purchases made during the VAT accounting year
  • Total VAT owed or overpaid for the VAT accounting year
  • The business’s VAT registration number and the accounting period covered by the return

Quarterly VAT Returns

In the UK, businesses that are registered for Value Added Tax (VAT) are required to submit quarterly VAT returns to HM Revenue & Customs (HMRC).

The VAT quarters run as follows:

  • 1 April to 30 June
  • 1 July to 30 September
  • 1 October to 31 December
  • 1 January to 31 March

The deadline for submitting a VAT return and making a payment to HMRC is one month and seven days after the end of the VAT quarter.

The VAT return must include the same information as an annual return, described above.

How to Complete a VAT Return?

To complete a VAT Return, businesses must calculate the total amount of VAT charged on sales and subtract the total amount of VAT paid on purchases. If the result is a positive figure, the business will owe VAT to HM Revenue & Customs (HMRC). If the result is a negative figure, the business will be due a VAT refund from HMRC.

If a business fails to submit their VAT Return or submit it late, they may be subject to penalties and interest charges. Additionally, if the Annual VAT Return shows that the business owes VAT to HMRC, this must be paid within the payment deadline to avoid further penalties.

It’s important for businesses to keep accurate records of their VAT transactions throughout the year in order to complete their Annual VAT Return correctly and on time. Some businesses may choose to hire an accountant or bookkeeper to help them with this task.

HMRC Penalties Relating to VAT

If a business that is registered for Value Added Tax (VAT) fails to submit their VAT returns or submit them late, they may be subject to penalties and interest charges. The VAT penalties system was updated on 1 January 2023, and is now based on a points system.

For each return you submit late, you’ll receive a penalty point until you reach the penalty point threshold. When you reach the threshold, you’ll receive a £200 penalty. You’ll also receive a further £200 penalty for each subsequent late submission while you’re at the threshold.

The penalty point threshold (PPT) is set by your accounting period. The threshold is the maximum points you can receive. Businesses who submit returns annually have a PPT of 2, those who submit quarterly have 4, and those who submit monthly have 5.

In addition to the penalties, HM Revenue & Customs (HMRC) may charge interest on any late payments of VAT owed.

If a business is experiencing difficulties with submitting their VAT returns on time or making VAT payments, they should contact HMRC as soon as possible to discuss their situation. HMRC may be able to offer support and advice to help the business get back on track with their VAT obligations.

VAT schemes for small businesses

There are several VAT schemes available for small businesses in the UK, designed to simplify the VAT process and reduce administrative burdens. The most popular scheme is the Flat Rate Scheme, which allows businesses with a turnover of less than £150,000 to pay a fixed percentage of their turnover as VAT, rather than calculating the actual VAT owed on each transaction. This can save time and money for small businesses, as well as providing a predictable VAT liability.

Here are some of the most common VAT schemes for small businesses:

VAT schemes for small businesses; london accountant
  1. The Flat Rate Scheme allows eligible businesses to pay a fixed rate of VAT to HM Revenue & Customs (HMRC) based on their turnover. The flat rate takes into account the business’s specific industry sector and is usually lower than the standard VAT rate. Businesses using the FRS are not able to reclaim VAT on purchases, except for certain capital assets over £2,000.
  1. This scheme allows eligible businesses to make one VAT payment per year, rather than four payments per year. The business must make interim payments throughout the year based on their estimated VAT liability, and then reconcile their account and pay any balance due or claim a refund at the end of the year.

This scheme allows eligible businesses to account for VAT on the basis of cash received and paid, rather than on invoices issued and received. This can help businesses to manage their cash flow, as they do not have to pay VAT on sales until they have been paid by their customers.

This scheme is designed for businesses that sell a high proportion of low-value items to non-VAT registered customers. The scheme allows businesses to calculate their VAT liability based on a percentage of their total retail sales, rather than on each individual sale.

This scheme is designed for businesses that sell second-hand goods, works of art, antiques, or collectors’ items. It allows businesses to pay VAT on the difference between the purchase price and the selling price of the goods, rather than on the full selling price.

Small businesses should carefully consider which VAT scheme is most appropriate for their business and seek professional advice if necessary.

Common mistakes to avoid when dealing with VAT

Dealing with VAT can be complex and mistakes can be costly. Here are some common mistakes to avoid when dealing with Value Added Tax (VAT) in the UK:

 

  1. Not registering for VAT on time:
    Businesses must register for VAT with HM Revenue & Customs (HMRC) if their taxable turnover exceeds the VAT registration threshold, which is currently £85,000. Failure to register for VAT on time can result in penalties and interest charges.
  2. Not charging the correct rate of VAT:
    Businesses must charge the correct rate of VAT on their sales, depending on the type of goods or services being sold. Charging the wrong rate of VAT can result in penalties and interest charges.
  3. Failing to keep accurate records:
    Businesses must keep accurate records of their VAT transactions, including sales and purchases, in order to complete their VAT returns correctly. Failure to keep accurate records can result in errors and omissions on VAT returns, which can lead to penalties and interest charges.
  4. Not reclaiming VAT on eligible purchases:
    Businesses can reclaim VAT on eligible purchases, such as goods and services used for business purposes. Failure to reclaim VAT on eligible purchases can result in increased costs for the business.
  5. Missing VAT return deadlines:
    Businesses must submit their VAT returns and make VAT payments on time to avoid penalties and interest charges. Missing VAT return deadlines can result in penalties and interest charges.
  6. Failing to notify HMRC of changes to business circumstances:
    Businesses must notify HMRC of any changes to their business circumstances that may affect their VAT registration or VAT liability. Failure to do so can result in penalties and interest charges.
  7. Not understanding VAT rules and regulations:
    VAT can be complex, and it’s important for businesses to have a good understanding of the rules and regulations surrounding VAT. Failure to understand VAT rules and regulations can lead to mistakes and errors on VAT returns, which can result in penalties and interest charges.

It’s important for businesses to take their VAT obligations seriously and to seek professional advice if they are unsure about any aspect of VAT.

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