In this section:
- Introduction to VAT
- Registering for VAT
- Choosing the best VAT accounting scheme for your business
- VAT rates and charging and reclaiming VAT on sales and purchases
- Keeping records, invoicing and accounting for VAT
- VAT returns, payments and refunds
- VAT problems, mistakes, adjustments, inspections and investigations
- Changing your VAT registration details or deregistering from VAT
- VAT and international trade
- VAT for charities and other not-for-profit organisations
- VAT for consumers
- VAT for tax agents and advisers
Introduction to VAT
Value Added Tax, or VAT, is a tax charged on most business-to-business and business-to-consumer transactions in the UK. VAT is also charged on goods, and some services, imported from places outside the European Union (EU) and on goods and some services coming into the UK from other EU countries.
VAT is charged to a buyer by a VAT registered seller. This VAT is reclaimed by a VAT registered buyer after goods and services are purchased.
There are three different rates of VAT - standard, reduced and zero - which apply to different types of goods and services. Some goods and services are exempt from VAT, while others are outside the scope of VAT. Businesses registered for VAT usually account for VAT on a quarterly basis by filling in a VAT return and submitting it to HM Revenue & Customs (HMRC).
This guide aims to explain the basics of how VAT works and where you can go to get more information and advice.
On this page:
- What is VAT?
- Who charges VAT and what VAT is charged on
- How VAT is charged and accounted for
- Rates of VAT
- Find out more about VAT
- VAT jargon busters
- More useful links
VAT is a tax charged on most business-to-business and business-to-consumer transactions in the UK.
If you are VAT registered business, VAT is a tax on the net value added to your products or services - the difference between the value of your sales and the value of your purchases.
If you are a non VAT registered businesses or organisation, or a consumer, VAT is a tax on your consumption.
You must register for VAT if your turnover for the previous 12 months is over a specific limit - currently £67,000 - or if you think your turnover may soon go over this limit. You may register voluntarily at any time. There are a few exemptions from registration.
VAT is charged by someone who is registered for VAT - a 'taxable person' - on:
- goods and services sold or otherwise supplied (eg barter) in the UK
- goods, and some services, imported from places outside the EU
- goods and services coming into the UK from other EU countries
For items which are standard rated or reduced rated for VAT, VAT is charged to the buyer (output tax) by the VAT registered seller. This VAT is reclaimed by the VAT registered buyer (input tax) after goods and services are purchased.
If you are registered for VAT generally you charge VAT on your business sales and reclaim VAT on your business purchases. The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT you must pay to HMRC. If the value of the VAT you reclaim is more than the value of the VAT you charge, then HMRC pays you.
If you are not registered for VAT, you do not charge VAT on your sales. You still pay VAT on your purchases and you cannot reclaim this VAT.
You usually account for VAT on a quarterly basis by filling in a VAT return and submitting it to HMRC. You then pay HMRC the excess of your output tax over the VAT you can reclaim as input tax. If the input tax you can reclaim is more than your output tax, you can reclaim the difference from HMRC.
Different VAT rates apply to different goods and services. Currently there are three rates:
- Standard rate - 17.5 per cent up to 30 November 2008. From 1 December 2008 to 31 December 2009 the standard rate is 15 per cent. It will change back to 17.5 per cent on 1 January 2010.
- Reduced rate - 5 per cent
- Zero rate - 0 per cent
The standard rate of VAT is the default rate for goods and services unless specified otherwise.
Examples of reduced rate items include:
- domestic fuel and power
- installation of energy-saving materials
- residential conversions
- women's sanitary products
- children's car seats
Examples of zero-rated items include:
- food - but not meals in restaurants or hot takeaways
- books and newspapers
- children's clothing and shoes
- public transport
Items not covered by VAT
Some items are not covered by VAT - exempt items and items which are outside the scope of VAT.
Items which are exempt from VAT include the following:
- providing credit
- education and training, if certain conditions are met
- fund-raising events by charities, if certain conditions are met
- subscriptions to membership organisations
Selling, leasing and letting of commercial land and buildings are also exempt from VAT. However you may elect to waive this exemption and choose to apply VAT at the standard rate. This is known as 'opting to tax'.
Items which are outside the scope of VAT include non-business items such as income from a hobby, or statutory fees such as an MOT test supplied directly by a test centre to its customer.
The difference between exempt and zero-rated
If you sell zero-rated goods or services, they are taxable for VAT at 0 per cent.
If you sell exempt goods or services they are not taxable for VAT. Unlike zero-rated supplies, exempt items are not treated as taxable. No tax is payable, but equally, the person making the supply cannot normally recover any of the VAT on their own expenses.
If you sell only exempt goods or services, generally you cannot register for VAT or reclaim VAT on purchases. If you sell some exempt goods or services, you may not be able to reclaim VAT on some purchases.
If you sell only zero-rated goods or services you may apply for exemption from VAT registration. If you pay little or no VAT on your purchases this would probably make sense.
Some plain English definitions of common VAT terms used by HMRC.
- Accounting period: see tax period.
- Acquisitions: goods brought into the UK from other EU countries Formerly imports.
- Corporate body: an incorporated body such as a limited company, limited liability partnership, friendly, industrial or provident society.
- Distance sales: where a business in another EU country sells goods to UK consumers, eg Internet or mail-order sales.
- Input tax: the VAT you pay on your purchases which you reclaim from HMRC.
- Output tax: the VAT you charge on your sales which you pay to HMRC.
- Place of supply: the country where a supply of goods or services is said to be made for VAT purposes.
- Self-billing: your customer issues your VAT invoice and sends a copy to you with their payment.
- Supply: selling or otherwise providing goods or services, including barter and some free provision.
- Supply of goods: when exclusive ownership of goods passes from one person to another.
- Taxable person: any business entity that buys or sells goods or services and is required to be registered for VAT. This can be an individual, partnership, company, club, association or charity.
- Taxable supplies: all goods and services you sell or otherwise supplied which are liable to VAT at the standard, reduced or zero rate. - whether or not you are registered for VAT.
- Taxable turnover: the total value - excluding VAT - of the taxable supplies you make in the UK. Excludes capital items like buildings, equipment, vehicles or exempt supplies.
- Tax period: The period of time covered by your VAT
return, usually quarterly.
Find more information on tax periods
- Tax point: the time when a VAT liability arises.
For goods, this is usually when you send the goods to a customer or
when they take them away. For services, this is usually when the service
Find out when transactions take place for VAT purposes
- Time of supply. See tax point.