VAT, or Value Added Tax, is a tax that the end consumer pays on every purchase. However, because it is part of the price of products, they do not bother to go into its details. For businesses, it is a profit-neutral tax, but VAT calculations can affect the profit. Due to the different VAT rates in the UK, it is easy to get lost in different rates and exemptions. We have covered all the related details about this indirect tax in this guide to make you confident while dealing with it.

What is VAT?- What Does VAT Stand For?

VAT is for Value Added Tax. It is an indirect tax that is included in the price of items that end consumers use. The VAT-registered companies add this tax to the price of their sold items. These companies pay this value-added tax on their purchased items. When filing their VAT returns, they pay the difference between input VAT and output VAT to the HMRC.

VAT Threshold UK

After a recent update, the UK VAT threshold is now £90,000. It means that for all the non-registered companies whose taxable turnover crosses £90,000 in a rolling 12-month period, fall into VAT category businesses. Taxable turnover means all the sales that are generated from taxable supplies. Taxable supplies are all the items on which VAT is charged. It also includes zero-rated VAT items. All businesses whose taxable turnover exceeds this limit are required to be registered with HMRC to collect this tax on their sold items.

Companies whose turnover remains below this threshold are not required to register. However, some companies still choose to register voluntarily. The advantage of voluntary registration is that they can reclaim any VAT paid on their purchases.

Unregistered companies whose taxable turnover is close to the threshold limit should monitor it closely. Upon crossing the limit, they should apply for VAT registration within the set deadlines.

VAT Rates in UK

Currently three VAT rates in the UK are applicable.

Standard VAT Rate (20%)

In the UK mostly items and services are charged with a standard VAT rate of 20%. Electronics, most professional services, and clothing, except for children’s clothing are included in this category.

Reduced VAT Rate (5%)

Items such as energy-saving installation, women’s sanitary products, and children’s car seats are charged with a reduced tax rate of 5% instead of 20%. The purpose of this reduced tax is to make these essentials affordable for people.

Zero-rated VAT (0%)

Some life essentials like foodstuffs, newspapers, books, and stamps are taxable items but no VAT is charged on them. These items are called zero-rated items and the purpose of this reduced tax is to make them more affordable for end consumers.

VAT Registration

A non-registered company should get VAT registration when its taxable turnover goes beyond £90,000 at any time over the past 12 months. After registration, HMRC issues this company a registration certificate. It shows

your company’s VAT number
the date from which the registration is effective, and
the due date for filing the first VAT return.

Businesses that voluntarily register themselves despite not being eligible for registration do it for two advantages. First, they can reclaim the input VAT they paid on their purchases. Second, it creates a more trustworthy image for their customers.

What is VAT? VAT Calculation & Accounting

If you are an end consumer then you never deal with terms like VAT calculation and VAT accounting. These terms are solely for businesses. They have to calculate the tax amount on their purchases and selling their goods. VAT accounting is for filing VAT returns and it’s about input VAT and output VAT.

VAT Calculation

There are many ways of VAT calculation. A simple method is you multiply the goods price with a tax rate increase by 1 to find out tax inclusive price. For example, for a 20% tax rate, multiply the product by 0.20+ 1= 1.20. To find out the price without value added tax, divide by 1.20.

Let’s explain with an example.

Product price = £200

Applicable tax rate = 20%. Then multiple £200×1.20= £240. £40 is charged on this product as a value-added tax.

If you want to determine how much tax is added to a product price, simply divide the product price by 1.20.

Product Price = £540 ( inclusive of tax)

£540 / 1.20= £450

Tax amount= £540 – £450= £90( added tax)
If the tax rate is 5%, you will multiply the goods amount by 1.05 to find out the tax-inclusive amount. For the VAT-exclusive price, divide the price by 1.05.

VAT Accounting

Value-added Tax is a type of tax that the consumers pay. But consumers don’t pay for it directly. The businesses add this tax into the product’s price and then pay it to HMRC on behalf of consumers. Business entities then reclaim this tax in their VAT returns. We can understand this process with an example.

A company XYZ selling refined coffee purchased coffee beans. The £100 is included in the price of coffee beans as VAT, added by the seller of coffee beans. This VAT is called input VAT for company XYZ. Now at the final stage of coffee jars, this company adds tax of £150, as VAT for final consumers. Now this company is bound to pay this £150 to HMRC on behalf of final consumers. Out of this £150, this company has already paid £100 on its purchases. So it will only pay the remaining £50 to HMRC which it will claim in its VAT return as Reclaiming VAT.

Final VAT paid by the company= Output VAT – Input VAT

The companies are not entitled to reclaim VAT paid on their private purchases.

VAT Return

As discussed in the previous section, businesses pay taxes on behalf of customers to HMRC. Companies can reclaim this tax by submitting their VAT returns every quarter. In their return, they show the difference between output VAT and input VAT. There is another special scheme of Flat rate Scheme for businesses with annual turnover of less than £150,000.

These companies submit a fixed percentage of their annual taxable turnover to HMRC every quarter. This reduces the administrative burden of such small companies.

What is VAT Number

Every VAT-registered company gets its VAT number from HMRC. It’s a 9-digit unique code starting with GB. You can only claim input VAT if your return has a correct value-added tax number. Moreover, businesses can verify and check its validity from the UK official website.

Reclaiming VAT

Reclaiming Value Added Tax is the main reason for submitting companies’ VAT returns. It is calculated by the difference between the VAT that businesses pay and the tax which they charge on their goods. Businesses can claim the tax that they pay on goods only for business purposes. For example, tax paid on office furniture, computers, and transportation can be claimed back.

No tax can be claimed back on business entertainment costs or goods for personal use. The reclaiming VAT calculation is not simple. Only a tax expert can calculate the correct reclaiming tax after considering exemptions and exceptions.

VAT on imports and exports

Businesses involved in international trade deal with VAT import and VAT export. Tax rules differ depending on the type of trading goods and the trading country. If the business is importing goods from the European Union, they are considered as purchasing within the UK, so the same rates applicable in the UK will apply.

If the goods are exported to the European Union, then VAT rules will vary depending on the goods exported. Moreover, the VAT registration status of that business will also be considered. If goods are exported to non-European countries, then these goods are zero-rated and are not subject to value-added tax.

VAT For Property

Different VAT rules are applicable to different types of properties, such as charitable buildings, residential, commercial, construction, or renovations. All the VAT rates in the UK are applicable to properties. These can be standard tax rates, zero-rated, reduced, or exempt from tax.

What is VAT Exemption

VAT exemption means items on which tax is not charged. Most food items are exempt from tax. However, alcoholic drinks, soft drinks, hot foods, and crisps are not included in this category. There is a long list of items that are exempt from VAT.

FAQs

Yes there is VAt on charities. Charitable businesses should register for VAT when their taxable turnover exceeds the threshold amount for VAT registration. They should charge tax on taxable goods, and they are also entitled to reclaim VAT.

The standard VAT rate for 2024 is 20% on most goods and services.

No, although most goods are charged with the standard rate, some are charged with a reduced tax rate, some are zero-rated, while others are exempt from tax.

VAT exemption includes education and training, hospital treatment, finance and insurance, selling and leasing of commercial land and buildings and charity fundraisers.

Import VAT is a tax that a business pays on its imports. A standard tax rate of 20% is paid on all imports from both European Union and non-European countries.

VAT export is also called zero-rated tax because no tax is charged on exported goods from the UK to other countries.

VAT penalties are imposed as a percentage of the tax that is due to be paid by the respective company. The rate depends on how late the tax is submitted. It is calculated from the due date of registration till the date HMRC receives your notification or becomes aware that you are liable to be registered.

Conclusion

It’s beneficial for businesses to get a clear understanding of what VAT is, VAT registration, VAT rates in the UK, VAT numbers, and the process of verifying VAT numbers. It’s obligatory for companies to submit VAT to HMRC. Only after understanding every VAT concept can they make a well-informed decision.

What is VAT? A Complete Guide on UK VAT