Most services and goods that are supplied by a VAT-registered business registered will have a type of tax added to them called Value Added Tax. The business will charge the VAT on each taxable item or service that it sells, and it can be charged to both individual consumers, and to other businesses. If the a business is registered for VAT, it’s able to claim back the VAT it has paid on services and goods, as long as they’re used by the business.
Registration for VAT
A business must register for VAT when its turnover in any 12 month period reaches the registration threshold, which is currently £85,000. It is possible to register on a voluntary basis, as this can sometimes be beneficial to the business. For instance, early registration means a business which pays more VAT on purchases than it collects on sales is able to reclaim the difference.
Rate of VAT
There are three rates of VAT – zero, standard and reduced. The standard rate is 20 per cent, while the reduced rate is five per cent. The most commonly used rate is the standard, which is applied to most of the services and goods in the UK.
There are some goods and services that are zero-rated, including food other than hot food in a takeaway or restaurant meals. Other zero-rated items include clothes and shoes for children, newspapers and books, and public transport, along with other items.
The reduced rate is applied to car seats for children, sanitary hygiene products, and fuel and power for domestic use. There are many other items that attract a reduced rate of VAT. Check out HMRC’s guide to different VAT rates, and when to use them.
There are some goods and services that are exempt from VAT altogether. Among those are insurance services, the provision of credit, education, and most of the services provided by dentists or doctors.
What’s the difference between exempt and zero-rated?
There is a difference between zero-rated and exempt items, although the rate for both is effectively zero. If a registered company sells zero-rated services or goods, it can’t charge any VAT but it can claim back the VAT which it has paid on its expenses. If goods are exempt, no VAT is charged but the company is unable to claim back anything paid on the expenses.
How do I report VAT?
Businesses which are VAT registered must complete a VAT return on a regular basis. This tells HMRC how much VAT you have charged on sales, and how much you have paid on your purchases. This helps them work out whether you need to pay the difference to them, or reclaim it.
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