VAT is a UK tax on goods and services, with rates ranging from 20% to 0%. Businesses must register if their taxable turnover exceeds £90,000 in the past 12 months, acquire a VAT-registered business as a going concern, or purchase goods or services VAT-free from non-UK countries. Exceptions include unregistered supplies, zero-rated supplies, and exempt supplies. Businesses must maintain accurate VAT records for at least six years and use MTD-compliant software for records and returns.
Understanding VAT in the UK: A Practical Guide for Beginners
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United Kingdom
Author: Ema Stamenković
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Content accuracy validation date:
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Certain services are exempt from VAT, including some financial services, property transactions, insurance, education, and healthcare. Exempt supplies do not count toward taxable turnover.
VAT Rates in the UK
- 20% (standard rate): Applies to most goods and services unless specified otherwise.
- 5% (reduced rate): Covers domestic fuel, energy-saving materials, sanitary products, and children’s car seats.
- 0% (zero rate): Includes food, books, newspapers, children’s clothing, exports, new houses, and public transport.
VAT Registration
A business must register for VAT if:
- Taxable turnover exceeds or is likely to exceed £90,000 in the past 12 months (checked monthly).
- A VAT-registered business is acquired as a going concern (TOGC).
- Goods or services are purchased VAT-free from non-UK countries (self-supply). Businesses below the threshold may voluntarily register. Taxable turnover is total income, not just profit. Late registration incurs fines.
Future Test
If a business expects taxable supplies to exceed £90,000 in the next 30 days, it must register immediately.
Exceptions
VAT is not charged on:
- Supplies by unregistered businesses not required to register.
- Zero-rated supplies.
- Supplies made outside the UK.
- Exempt supplies.
Exempt and Zero-Rated Supplies
- Exempt: Businesses making only exempt supplies cannot register for VAT and may not reclaim all input tax if registered.
- Zero-rated: Businesses making only zero-rated supplies may choose to register for VAT, often beneficial for reclaiming input tax.
Input and Output Tax
- Input tax: VAT paid to suppliers on goods/services, reclaimable by registered businesses.
- Output tax: VAT charged on sales, collected from customers.
Simplified VAT Schemes for Small Businesses
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
- Margin schemes for second-hand goods
- Global Accounting
- Retail VAT schemes
- Tour Operators’ Margin Scheme
- Bad Debt Relief
VAT Calculation
- Add VAT to sales by multiplying the sale amount by the VAT rate and adding it to the sale value.
- Output tax: Total VAT on sales for a VAT period.
- Input tax: Total VAT paid to suppliers (e.g., stock, repairs, rent).
- VAT return: Output tax minus input tax determines the amount payable to or reclaimable from HMRC.
Records
Businesses must keep accurate VAT records for at least six years, including:
- Sales and purchases (with adjustments like credit notes).
- VAT charged/paid, imports, exports, and personal use of supplies.
- All invoices issued/received.
- A VAT account showing input/output tax calculations. Inaccurate records can lead to penalties.
Making Tax Digital (MTD)
Certain businesses must use MTD-compliant software for VAT records and returns.
Time of Supply (Tax Point)
Determines when VAT is due.
VAT Returns
VAT-registered businesses submit returns (usually quarterly or monthly) summarizing:
Sales total (excluding VAT).
- Output tax, including VAT on other taxable transactions (e.g., barters, personal use).
- Purchase value (excluding VAT).
- Claimable input tax.
- Total VAT payable/reclaimable.
- Online returns and payments are due one month and seven days after the VAT period ends. Direct debit payments are collected three days later.
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