Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man.
It is also charged on goods, and some services, imported from places outside the European Union and on goods and some services coming into the UK from the other EU countries.
All goods and services that are VAT rated are called ‘taxable supplies'. You must charge VAT on your taxable supplies from the date you first need to be registered. The value of these supplies is called your ‘taxable turnover'.
Some examples of taxable supplies:
selling new and used goods, including hire purchase
renting and hiring out goods
using business stock for private purposes
providing a service, for example hairdressing or decorating and
charging admission to enter into buildings.
If you are VAT registered, you will charge VAT on many goods and services you supply to customers in the UK and Isle of Man.
VAT does not apply to certain services because the law says these are ‘exempt' from VAT. These include loans of money, some property transactions, insurance and certain types of education and training. Supplies that are exempt from VAT do not form part of your taxable turnover.
There are three rates of VAT in the UK:
5% (reduced rate) and
You will probably have to register for and charge VAT if:
your taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
you have taken over a business as a going concern or
you acquire goods from other European Union countries.
The current VAT registration threshold is £60,000. But you can opt to register for VAT if your taxable turnover is less than this, if what you do counts as a business for VAT purposes. Turnover is the amount of money going through the business, not just the profit.
If you are in business and your taxable turnover, not just your profit, goes over the registration threshold you become a ‘taxable person'. You must then register for VAT. If you don't register at the correct time you could be fined.
The supplement to Notice 700/1 Should I be registered for VAT? sets out the current and past registration thresholds.
You must register for VAT if:
at the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £60,000 and
at any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold - £60,000 - in the next thirty days alone.
These rules also apply when you take over a business as a going concern (see Notice 700/9 Transfer of a business as a going concern). It doesn't matter whether the last owner was registered:
if the business is trading at a level above the limit then you'll need to register and
your date of registration will be the day you take over the business.
To register for VAT you must complete Form VAT 1, which you must send to Customs and Excise within 30 days of any of the above.
All goods and services which are liable to VAT at the standard, reduced or zero-rate are called ‘taxable supplies', whether you are registered for VAT or not. The total value of these supplies is called your ‘taxable turnover'. If you are in business and your taxable turnover reaches or is likely to reach the registration threshold you will probably have to register for VAT. You must charge VAT on your taxable supplies from the date you first need to be registered.
If you receive certain services from abroad, for example advertising, data processing, consultancy or legal, accounting or professional services, these will be treated as if you supplied them and you must include the value in your taxable turnover.
Input tax is the VAT that you pay out to your suppliers for goods and services that you purchase for your business. It is VAT on goods or services coming IN to your business. Input tax is the VAT that registered businesses can reclaim.
Output tax is the term used to describe the VAT on your sales of goods or services. Output tax is the VAT on goods or services going OUT of the business. Output tax is the VAT you collect from your customers on each sale that you make.
Why would I want to register for VAT if my taxable turnover is below the threshold?
If your taxable turnover is below the registration threshold you can apply for ‘voluntary registration', if you can prove that what you do is a business for VAT purposes. There are advantages and disadvantages to registering voluntarily. Before you apply weigh up carefully whether it will benefit you.
Benefits include increased credibility for your business and, if your business makes standard or zero-rated supplies, you'll be able to claim back input tax.
However, once registered for VAT, you‘ll have to:
account for output tax on all your taxable supplies
keep proper VAT records and accounts and
send in VAT returns regularly.
For more information call the C&E National Advice Service 0845 010 9000.
No VAT is charged on taxable supplies made by a business which is not, and is not required to be, registered for VAT. These are known as ‘outside the scope' supplies.
VAT does not apply to certain services because the law says these are ‘exempt' from VAT. These include loans of money, insurance, certain types of education and training and some property transactions (selling, leasing and letting land and buildings, but not garages, parking spaces, hotel or holiday accommodation).
Supplies that are exempt from VAT do not form part of your taxable turnover.
If the only services you supply are exempt supplies, you can't normally be registered for VAT. If you are registered for VAT and have some exempt supplies you may not be able to get all your input tax back.
If you only supply goods that are zero-rated, you may not have to register for VAT even if your taxable turnover goes above the registration threshold, but you do have to tell C&E first and apply to be ‘exempt from registration'.
I'm a small business - is there anything that will make VAT simpler?
There are a number of simplified arrangements to make VAT accounting easier for small businesses:
If your taxable turnover is under £660,000 a year you can arrange to account to Customs for VAT on the basis of cash received and paid, rather than the invoice date or time of supply.
Most businesses work on quarterly VAT periods and send in four VAT returns every year. However, if your turnover is under £660,000 you can join the annual accounting scheme and send in just one return a year.
If you use the scheme you do have to make regular payments throughout the year. This can help financial planning and cash flow. More details are in C&E Notice 732 VAT Annual Accounting.
If you are a retailer there are schemes, which offer you an alternative if it's impractical for you to issue invoices for a large number of supplies direct to the public.
Flat rate scheme
You're likely to be eligible if your turnover is under £150,000. This new flat-rate scheme was introduced in the 2002 Budget. It lets you save on administration because you don't have to account internally for VAT on each individual "in and out". You just pay over a set percentage of your total turnover. The rate depends on your business type.
Where can I find more detailed information online or in print?
Customs and Excise also produces a range of leaflets called Notices, which give more specific help and guidance. All the leaflets below are available on our website, or you can get copies from the National Advice Service on 0845 010 9000.
The VAT Guide: Notice 700 tells you more about what you should and shouldn't charge VAT on.
Should I be registered for VAT?: Notice 700/1 explains in more detail who should register for VAT and shows you how to fill in form VAT 1.
Filling in your VAT return: Notice 700/12 provides helpful hints on completing your VAT return.
The Ins and Outs of VAT: Notice 700/15 gives a simple introduction to output and input tax.
Keeping Records and Accounts:Notice 700/21 explains what records you will need to keep.
Catalogue of Publications: Notice 999 provides a list of all the current publications issued by Customs and Excise.
Can I speak to someone for more help?
Yes! Contact the Customs and Excise National Advice Service.
If you need general advice from H M Customs and Excise ring the National Advice Service on 0845 010 9000.
The service is available from 8.00 am to 8.00 pm Monday to Friday.
If you would like to speak to someone in Welsh, ring 0845 010 0300. The service is available from 8.00 am to 6.00 pm Monday to Friday.
If you have hearing difficulties please ring the Text phone service on 0845 000 0200.
All calls are charged at the local rate within the UK. Charges may differ from mobile phones.
C&E offer lots of support to help you on the track with your VAT. Shortly after you have registered they'll contact you and explain more about the options that are available, including:
Seminars - offered locally, both during and outside normal office hours, which include a basic introduction to VAT; and C&E offer special seminars to importers and exporters on the basics of international trader facilitation and procedures.
One-to-one consultations - individual appointments during office hours, giving you the opportunity to discuss your particular business.
To take advantage of these services ring the C&E National Advice Service 0845 010 9000. You don't have to be VAT registered to call! All services provided by the teams are optional and free of charge.