The basics of VAT
Value Added Tax (VAT) is a widely used term in the business world, but a few people understand how it works or where it is applicable. In simple terms, VAT is a consumption tax levied on the sales of products or services. It is termed as an indirect tax since businesses collect it on behalf of the government. Since its inception in 1973, VAT rates have changed over the years. Fair to say it’s either gone higher or lower depending on governments priorities, laws and changes in the economy.
As a business owner, you need to include VAT in the price of your goods or services, keep proper VAT records and pay the collected VAT to HMRC. The prices marked on items in-stores are VAT inclusive. However, some goods and services for instance dental services are exempted from VAT, while other activities are outside the VAT scope, e.g. hobbies. If you live outside the UK or you are a visitor in the UK, you may get a reimbursement of VAT paid on goods and services.
VAT Rates
There are three types of VAT rates in the UK, they include:
- Standard VAT rates – Currently 20%
- Reduced VAT rates – 5%
- Zero VAT rates – 0%
The customary rate of VAT increased from 17.5% in 2011 to 20% currently. Furthermore, the customary VAT rate applies to most goods and services unless particular goods or services are exempted from a VAT or deemed out of VAT scope.
Reduced VAT rate (5%) depends on the type of item sold or the circumstances surrounding the sale. Such items include:
- Children’s car seats
- Domestic fuel or energy costs
- Mobility aids for older people (for individuals over the age of 60)
Zero rate VAT implies that goods and services are within the VAT scope (taxable), but rate chargeable to customers is 0%. You have to include such products or services in your VAT records and file them in your VAT returns. These include;
- Books and newspaper
- Children’s shoes and clothes
- Motorcycle safety gears.
- Most of the goods exported to non-EU countries
- Goods supplied to an EU VAT registered business
- Energy-saving home installations
- Public transport fare
- Sanitary protection such as pads and tampons
- Basic or staple food items except for meals in a restaurants or takeaways
- Some goods provided under special circumstances like equipment for the disabled (vehicles, grab stairs or stairs lift)
These rates are subject to change and in case of any changes; you must affect the changes by configuring your POS on the date of such changes. Medical services and products supplied on health reasons, postage stamps as well as financial and property transactions are exempted from VAT including and should not be included in the VAT records. Furthermore, some goods and services such as legal fees, e.g. congestion charge and vehicle MoT tests are deemed to be outside the VAT scope.
Who Pays and How to Pay VAT
Any business within the UK with gross revenue of above £85,000, the VAT revenue threshold has to register to pay and charge VAT on their goods and services. Business with revenue below this threshold or start-ups may register for VAT on their own will. All the collected VAT must be paid to the HMRC while you are filing the VAT return.
HMRC accepts VAT payment in some payment methods including Faster Payments – online or mobile payment, CHAPS –Online form or direct debit, Credit Cards and BACS among other methods.
Have more questions about VAT or general business accounting?
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