HOW DOES VAT WORK: VAT is a tax on the amount by which the value of goods or a service increases at each stage of production or distribution. Examples for small businesses and charging VAT include:
- Those that sell goods or charge for services.
- Businesses hiring out or loaning goods to people.
- Sales to staff (e.g. staff discounts on goods).
- The disposing of business assets.
- The personal use of some business goods.
- ‘Non-sales’ items (e.g. gifts, part exchange items, or bartered goods).
These types of VAT charges are ‘taxable supplies‘ and apply to most small businesses. The general rate of VAT has been 20% in the United Kingdom since 2011. But, VAT for charities uses a different set of rules.
VAT Registered Business Responsibilities
All businesses with VAT registration need to know when to charge VAT on invoices for their services and goods. Nevertheless, they can also reclaim some of the tax on business related goods and services they paid for.
Vat-registered businesses report the amount they have charged (and paid) to HM Revenue and Customs. As a rule, a business VAT report must take place every three months (quarterly).
Most small businesses use a Government Gateway account for filling in a VAT Return form. Even so, companies can appoint a tax agent to handle their account with HMRC. Agents can be accountants, friends, or a relative.
The full value of business sales must be accounted for on the VAT Return form even if:
- You give goods or services in place of wages (such as taking something in a part-exchange deal).
- No VAT gets charged to the customer. The sales price must always include the correct Value Added Tax amount.
If the company charges more VAT than it pays then the difference is payable to HMRC. If business VAT charges are less than it pays then the company can apply for a refund from HM Revenue and Customs.
Different VAT Rates in UK
The United Kingdom has three different rates of VAT for goods and services. There is also an extra rate for tax exempt goods. You must charge the correct rate and the 3 VAT rates are:
Standard UK VAT Rate: 20%
The majority of goods and services get charged at the standard rate of 20%. The standard rate always applies unless the goods and services are on the reduced or the zero-rated list. Standard rated goods include:
- Supplying goods to non-registered EU customers below the ‘distance selling threshold’. If the value goes above the threshold the company will need to register in each country.
- Services supplied to EU non-business customers. The rules vary on VAT for EU businesses.
Reduced UK VAT Rate: 5%
The reduced rate is set at 5%. Charging this rate not only depends on the item sold but also on the circumstances of the sale. Examples of the reduced rate include:
- Household home energy (e.g. gas and electric)
- Child car seats
- Mobility aids for the over 60s (if installed in their home)
- Solar panels
- Smoking cessation products (e.g. nicotine patches, gum)
Zero Rated Value Added Tax: 0%
Zero-rated goods are VAT taxable but the amount of tax is 0%. This means the amount charged to the customer is nothing (zero). But, businesses must still record them as a taxable item so they show on their return.
Some typical examples of zero rated goods include:
- Most food products
- Books and magazines
- Babywear and children’s clothes and footwear
- Motorcycle helmets (with the CE mark)
- Incontinence products
- Water supplied to households
- Exports of goods to non-EU countries
- Supplying goods to a tax registered EU business
Note: Tax exempt is not zero-rated tax even though no VAT applies. There are different rules for tax exemption. If your company only sells tax exempt goods and services you cannot apply for VAT registration.
If you sell goods to EU registered companies you must have their tax registration number and VAT paperwork. It can be a paper or electronic version. The documentation must prove you sent the goods within set time limits (3 months as a rule).
In cases where the rates change you must apply the changes to the invoice on the date of change. It should not apply as the order date or the delivery date.
Note: Use the European Union VIES VAT number validation web page for confirmation of business registration.
ALSO IN THIS SECTION
Charging VAT to Charities
Any VAT registered company can sell goods and services to charities. The guide explains how and when charging VAT to charities can occur at zero or reduced rates.
VAT on Discounts and Free Goods
Charging VAT on discounts and free goods is part of business accounting. Check when you need to charge Value Added Tax on discounted goods and special deals.
When to Charge VAT on Invoices
Most businesses need to charge Value Added Tax on the sales of company goods or services. Review the process for charging business VAT and when to charge VAT on invoices.