VAT (Value Added Tax)
VAT is a consumption tax applied to the majority of products and services sold by VAT-registered businesses.
VAT-registered business
A VAT-registered business is one that has either met the VAT registration threshold and is required to charge VAT on its taxable supplies, will meet the registration threshold shortly or has voluntarily registered for VAT. As of 2023, you have to register for VAT as a business or self-employed individual if:
- Your business’s total VAT taxable turnover for the last 12 months exceeds the threshold of £85,000.
- You expect your turnover to exceed £85,000 in the next 30 days.
Once registered, you must collect VAT on goods and services and pay it to HMRC.
VAT threshold
The VAT threshold is the annual turnover amount above which a business is required to register for VAT. This threshold varies but is currently £85,000 in the UK (measured over 12 months).
Supply
Providing goods or services in return for payment.
Taxable supplies
Taxable supplies refer to goods and services on which VAT is charged. This includes most goods and services, with some exceptions, such as zero-rated items, exempt supplies, and items outside the scope of VAT.
“Outside the scope” includes tax payments, MOTs, tolls for public roads and bridges and other miscellaneous expenditures.
Exempt supplies
Exempt supplies are goods and services that are exempt from VAT.
The Government provides a list here. Exempt supplies include sports activities, betting and lotteries, and health-related expenditure, to name but a few.
Businesses providing exempt supplies cannot reclaim VAT on related purchases.
Zero-rated supplies
Zero-rated supplies are goods and services subject to VAT but charged at a rate of 0%. This isn’t the same as exempt supplies.
If resellers sell zero-rated products, they can reclaim VAT on purchases that are directly linked to the sale of those goods. However, resellers dealing with exempt products are not eligible to claim VAT on those purchases.
Examples of zero-rated supplies include certain types of food, books, and children’s clothing.
Standard, reduced, and zero VAT rates
VAT rates vary depending on the type of goods or services being supplied. The standard rate (currently 20%) is the default VAT rate applied to most goods and services.
Reduced rates (5% as of 2023) apply to specific items and services, such as energy-saving materials, some fuels and mobility aids.
Zero-rated items, as mentioned above, are subject to VAT but charged at 0%.
VAT return
A VAT return is a periodic report submitted by VAT-registered businesses to HMRC, detailing the VAT collected on sales and the VAT paid on purchases.
This report calculates the net VAT owed to, or reclaimed from, the tax authority.
Input VAT and output VAT
Input VAT refers to the VAT paid by a business on its purchases, while output VAT is the VAT collected by a business on its sales.
The difference between input VAT and output VAT is the net VAT amount payable or reclaimable from HMRC.
VAT reclaim
A VAT reclaim occurs when a business has paid more VAT on its purchases than it has collected on its sales. In this case, the business can reclaim the difference from the tax authority.
Reverse charge
The reverse charge mechanism shifts the responsibility of accounting for VAT from the supplier to the customer. The domestic reverse charge is primarily used in construction.
By familiarising yourself with these essential VAT terms and concepts, you can better understand and manage your business’s VAT obligations.
Staying informed and compliant with VAT regulations is crucial for businesses to avoid penalties and ensure smooth financial operations.
Hugh Davies & Co provide tax advice and accountancy services to businesses of all sizes.
Contact our expert team today for professional business help and advice.