A business can only charge Value Added Tax if it has VAT registration with HM Revenue and Customs. This section explains how businesses and charging VAT works in the United Kingdom.
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:
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, a different set of Value Added Tax rules apply to charities.
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:
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.
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:
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:
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:
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:
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 paperwork. This 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.
Charging VAT to Charities: Selling goods and services to charities at zero or reduced rates of tax.
VAT on Discounts and Free Goods: Charging VAT on discounted goods and special deals.
When to Charge VAT on Invoices: What must businesses do when charging VAT to customers?
Businesses and Charging VAT Rules in the United Kingdom