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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?

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.

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Who charges VAT and what VAT is charged on

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

How VAT is charged and accounted for

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.

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Rates of VAT

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:

  • insurance
  • providing credit
  • education and training, if certain conditions are met
  • fund-raising events by charities, if certain conditions are met
  • subscriptions to membership organisations

More about VAT exemptions for education in VAT Notice 701/30

More about how VAT applies to charity fundraising events

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'.

More information on opting to tax land and buildings in VAT Notice 742A

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.

Find out more about exemption from VAT registration

Find out about exempt and partly exempt goods and services

Find more information on the rates of VAT

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Find out more about VAT

Find out about registering for VAT

Find information about alternative VAT accounting schemes that can help businesses save time and money

Find out more about how VAT works and VAT rates for particular goods and services.

Find out about keeping records, invoicing and accounting for VAT

Find out about filling in VAT returns and paying or reclaiming VAT

Read about how to meet your VAT obligations and find out about visits from VAT officers

Find out how to change or cancel your VAT registration

Find further information about VAT if you trade internationally

Find information about VAT for charities and other not for profit organisations

Find out about what VAT means for you if you are a consumer

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VAT jargon busters

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 is performed.
    Find out when transactions take place for VAT purposes
  • Time of supply. See tax point.

Find out more about the place of supply

More about self-billing in VAT Notice 700

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More useful links

Get HMRC Notice 700 'The VAT Guide'

Get HMRC Notice 700/1 'Should I be registered for VAT?'

Get HMRC Notice 700/9 'Transfer of business as a going concern'

Get HMRC Notice 700/2 'Group and divisional registration'

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