VAT in the UK
Having a knowledge of VAT fundamentals or value-added tax, is vital for all business owners, ensuring your business is compliant with current UK VAT regulations. Business owners need to be familiar with input and output tax, the scope of VAT and when a business must register for VAT.
VAT in the UK is a tax on goods and services sold in the United Kingdom. It is a tax that is paid by the consumer and is currently charged at a rate of 20%. Some goods and services are exempt from VAT or are subject to a lower rate.
Input and output tax
When a VAT registered business makes a taxable supply, it must charge VAT to its customers. This is known as output tax. The business can then reclaim the VAT that it has paid on its purchases, such as the VAT on goods purchased from other businesses. This is known as input tax.
The difference between the output tax and input tax is the amount of VAT that the business owes to HM Revenue and Customs (HMRC). If the output tax is greater than the input tax, the business must pay the difference to HMRC. If the input tax is greater than the output tax, the business can reclaim the difference from HMRC.
Scope of VAT
UK VAT consists of taxable supplies and exempt supplies. Taxable supplies are subject to VAT at three rates, 20%, 5% and 0%. Exempt supplies are not taxable supplies. Businesses with exempt supplies are unable to register for VAT. They do not charge VAT on their outputs and are unable to reclaim VAT on inputs.
Standard rated VAT supplies
These are supplies that are subject to the standard rate of VAT of 20%.
Reduced rated VAT supplies
These are supplies that are subject to a lower rate of VAT, which is currently 5%, for example, home energy.
Zero rate VAT supplies
These are supplies that have a 0% VAT rate, such as books, children’s clothes and non-luxury food.
Exempt Supplies
These are supplies that are not subject to VAT such as postage stamps, and education.
Outside the scope of VAT
Certain supplies are outside the scope of VAT, such as wages.
Calculating VAT
The amount of VAT that is due on a taxable supply is calculated by multiplying the price of the supply by the VAT rate. For example, if a business sells a product for £100 and the standard rate of VAT is 20%, then the amount of VAT due is £20.
Registering for VAT
Businesses that have a taxable turnover of more than £90,000 per year must register for VAT. Businesses that have a taxable turnover of less than £90,000 per year can choose to voluntarily register for VAT.
Once a business is registered for VAT, it must charge VAT on all of its taxable supplies. It must also keep records of its VAT transactions and submit VAT returns to HMRC on a quarterly basis.
To learn more about how VAT is calculated and the different VAT schemes that are available to small businesses, click below:
HMRC resources:
Register for VAT: When to register for VAT – GOV.UK (www.gov.uk)
VAT rates on different goods and services – GOV.UK (www.gov.uk)
