An Introduction to VAT (Value Added Tax) (Mar 2022)

Introduction

VAT is a tax on most goods and services, and is paid at each stage of the production and distribution chain. VAT-registered businesses must add VAT at the appropriate rate to the net sale price of any VAT-liable goods or services that they supply.

HM Revenue & Customs (HMRC) is responsible for ensuring that businesses comply with VAT rules and meet their responsibilities with regard to accounting for and paying VAT.

VAT is a complex subject and it is important to seek professional advice or contact HMRC for guidance to ensure compliance.

This factsheet covers VAT registration, the different rates of VAT, charging VAT and record keeping.

Registering for VAT

Businesses, including sole traders, partnerships, limited companies, limited liability partnerships, clubs, associations, charities and trusts, must register for VAT if:

• Their taxable turnover is more than £85,000 over the last 12 months.

• Their taxable turnover will be more than £85,000 in the next 30-day period.

Businesses can register voluntarily for VAT before their taxable turnover reaches the mandatory registration threshold.

Most businesses can register for VAT online (known as a Government Gateway Account). However, a business can also appoint an accountant (or agent) to register for VAT and deal with HMRC on their behalf.

When a business registers, they will receive a VAT registration certificate which will

confirm:

• Their VAT number.

• When the first VAT return and payment need to be submitted.

• The 'effective date of registration'.

From the effective date of registration, a business must: Charge the right amount of VAT.

• Pay any VAT due to HMRC.

• Submit VAT returns.

• Keep VAT records and a VAT account.

Go to www.gov.uk/vat-registration for more information about VAT registration.

VAT rates

VAT must be charged on 'taxable supplies', which include: The sale, loan or hire of goods and services.

• Sales of business assets.

• Commission.

• Business goods used for personal reasons.

• 'Non-sales' such as bartering, part-exchange and gifts.

VAT must be charged at specific rates that vary according to the type of goods or services supplied. There are three rates of VAT in the UK, as follows:

• The standard rate of 20% , which applies to most goods and services that are supplied in the UK.

• The reduced rate of 5% , which is charged on certain products and services such as children's car seats, some healthcare products and the conservation of some buildings.

• The zero rate (0%) , which applies to specific categories of goods including children's clothes and shoes and books and newspapers. The zero rate also applies to:

1. Most goods exported from England, Wales and Scotland to a country outside the UK.

2. Most goods exported from Northern Ireland to a country outside the EU

3. 
   

4. Goods supplied from Northern Ireland to a VAT-registered EU business.

Go to www.gov.uk/vat-registration/selling-or-moving-goods-in-northern-ireland for more information about VAT in Northern Ireland.

Exempt goods and services

Exempt goods or services are supplies that a business cannot charge VAT on. Examples include:

• Insurance.

• Postage stamps or services.

• Health services provided by doctors.

Out-of-scope goods and services

Some goods and services are outside the VAT tax system, so VAT cannot be charged or reclaimed on them. These include:

• Statutory fees such as the London congestion charge.

• Goods sold as part of a hobby such as stamps from a collection. Donations to a charity.

Further information about VAT rates applicable to different goods and services is available at www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services.

Charging VAT

If a transaction is for or includes a standard, reduced or zero-rated item or service, a business must:

• Charge the right rate of VAT.

• Work out the VAT if a single price is shown that includes or excludes VAT. Show the VAT information on invoices.

• Show the transaction in their VAT account.

• Show the amount on their VAT return.

VAT records

Businesses must keep VAT records for at least six years. Records must be kept digitally and include:

• The business name, address and VAT registration number. Any VAT accounting schemes the business uses.

• The VAT on goods and services supplied.

• The VAT on goods and services received.

• The rate of VAT charged on goods and services the business supplies.

Businesses must use a compatible software package or other software (such as spreadsheets) that connect to HMRC systems.

Go to www.gov.uk/vat-record-keeping/making-tax-digital-for-vat for more information.

Related factsheets

BIF015 An Introduction to Tax, National Insurance and VAT 
 BIF045 VAT Returns and Payments


 BIF483 Tax Deadlines in 2022


 BIF505 VAT Margin Schemes


 BIF506 VAT Retail Schemes Mar 2022

Document downloaded on 08-11-2022 from Croner-i Navigate, the UK’s leading online research service for tax, audit and accounting professionals. Find out more at www.croneri.co.uk or call 0800 231 5199.

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