When to Charge VAT on Invoices
Most businesses need to charge Value Added Tax on the sales of company goods or services. This guide explains the process for charging business VAT and when to charge VAT on invoices.
CHARGING VAT: Either an electronic or a paper form shows the amount of Value Added Tax customers pay.
So, what must businesses do when they are charging VAT on invoices to customers?
Supplies are taxable at either the standard, reduced, or zero-based rate. Thus, each transaction must show:
- You charged the correct and current VAT rates - and shown on the invoice.
- The transaction in the business VAT account (summary) including the rate and amount charged on the business tax return.
A valid VAT invoice displays the amount paid by a company or a person for certain goods or services. Businesses must charge and reclaim tax at the correct rates for the United Kingdom.
As a rule, you can reclaim Value Added Tax on purchases relating to the business sales. But, there are situations where you cannot always reclaim the amount you paid. An example would be if the business pays tax on certain products used to make tax exempt items.
Note: Always check the levy charged on your business purchases. You cannot claim back any incorrect rates if you get overcharged.
Charging VAT Inclusive and Exclusive Prices
Part of small business tax rules includes making the correct calculations and knowing when to charge VAT on invoices. You will need to work out how much to charge and the amount you can claim back on items purchased as VAT inclusive.
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Working Out VAT-Inclusive Prices
This refers to the total price charged after the addition of Value Added Tax.
- Multiply the pre-tax price by 1.2 to calculate the standard rate of 20%.
- Multiply the pre-tax price by 1.05 to calculate the reduced rate of 5%.
Working Out VAT-Exclusive Prices
This refers to the pre-tax price without the addition of Value Added Tax.
- Divide the total price by 1.2 to calculate the pre-tax price excluding the standard rate of 20%.
- Divide the total price by 1.05 to calculate the pre-tax price excluding the standard rate of 5%.
When Business Should Not Charge VAT
Businesses cannot charge Value Added Tax on any exempt items or those classified as 'out of scope'.
VAT Exempt Goods and Services UK
Companies still need to record all purchases and sales of tax exempt items. You must enter them into the general business accounting system. Examples of exempt goods and services include:
- Insurance, finance, and credit.
- Education and training.
- Fundraising events by charities.
- Subscriptions to magazines.
- Postage stamps.
- Doctor health services.
Note: HMRC provides a list of VAT rates on different goods and services on the GOV.UK website.
Exempt Goods and Services for VAT Registration
Tax exempt is not zero-rated tax even though no VAT applies. There are different rules for tax exemption. You cannot apply for VAT registration if you only sell tax exempt goods and services.
If a company starts selling goods or services that are not exempt then it can voluntarily register for VAT.
The business 'must register' if sales of taxable items go over the VAT taxable turnover threshold. This includes any time it goes over the threshold while selling only 'non-exempt' zero-rate items.
Out of Scope VAT Items
Certain goods and services fall outside of the Value Added Tax system in the United Kingdom. That means they cannot charge or reclaim the extra tax on them. Examples of out of scope VAT items include:
- Donations to registered charities (given without something in return).
- Goods you sell as part of a hobby (e.g. Movie Memorabilia, stamp collections).
- Goods and services purchased and used outside of the European Union.
- Government statutory fees (e.g. the TfL Congestion Charge in London).
Process for Returned Goods
There are a couple of ways to deal with the paperwork when returning goods to a supplier or receiving returns from customers. The receiving company can issue a replacement invoice or issue a credit or debit note.
Note: The business does not need to issue new VAT invoices when exchanging goods of the same value.
Credit and Debit Notes
The note needs to show the information of the original invoice (i.e. invoice number and date). It must also show why the note is being raised and the amount of credit or debit minus the VAT content.
Providing Services to EU Businesses
Companies that supply services to business customers in the EU cannot charge UK VAT. Thus, it is the customer's responsibility to pay the added tax in their particular county. But, some will have different rules on place of supply services, such as:
- Hiring as a means of transport.
- Land related services such as agricultural work or valuing properties.
- Passenger and freight transport.
- Events.
- The special accounting schemes for digital services (VAT MOSS service).
- Acting as an intermediary (e.g. an agent or broker).
Note: Check further details of various services eligible for zero rating when supplied in the United Kingdom
When to Charge Value Added Tax: Charging Business VAT on Invoices in the United Kingdom