Basis of Charge
Value Added Tax (VAT) is charged on the supply of goods and services in the UK and on the import of goods and certain services into the UK.
Special rules are applied to transactions within the European Union (EU), these are outlined below.
All supplies of goods and services to UK and overseas customers are taxable supplies, apart from items which are specifically exempt (see below). Goods taken for own use are also classified as taxable supplies valued at cost.
Business gifts are taxable supplies except where the gift is valued at 50 or less and does not form part of a series of gifts to the same person. These gifts would be valued at cost. Vat is not normally charged on gifts of services.
There are currently three VAT rates, a standard rate of 17%, a zero rate, and a reduced rate of 5%.
There are 16 groups of zero rated items, the main ones are
- Food, except when supplied in the course of catering or a non essential item such as chocolate,
ice cream, alcoholic and fruit drinks and crisps.
- Water and sewerage services except where supplied for industrial purposes.
- Books (but not stationery)
- Construction of buildings for residential or charitable use.
- Children’s clothing and footwear.
- Transport (but not taxis or hire cars)
- Drugs and medicines on prescriptions
Items currently charged at the reduced rate of 5% are
- Fuel and power for domestic and charitable use
- Installation of energy saving materials eg. Loft insulation in residential or charitable buildings
- Grant funded installation of central heating systems, water heating systems and home security goods
- Children’s car seats
- Women’s sanitary products
- Certain residential conversions, renovations and alterations.
Broadly speaking supplies categorised as exempt are
- Betting, lotteries and Gaming (Except takings amusement machines).
- Burial and Cremation
- Charity fund raising events
- Financial services
- Health and welfare services
- Investment gold
- Postal services
- Supplies of goods on which no input tax was recoverable
- Supplies to members by trade unions and professional bodies
If a business makes only exempt supplies it does not charge vat but cannot recover input tax charged to it therefore its prices need to be set to recover the vat suffered.
Some businesses may make both taxable and exempt supplies and are therefore partially exempt. A business that is partially exempt can still recover all of the input tax despite the exempt supplies IF the input on exempt supplies does not exceed 50% of the total input tax and does not exceed “625 per month on average.
If these limits are exceeded there are rules to determine how much of your input tax can be recovered:-
All of the input tax directly attributable to taxable supplies can be recovered but none of the input tax attributable to exempt supplies.
As to the remainder of the input tax that relates to overheads, under the standard method input tax is deductible in the proportion that taxable supplies bear to total supplies.
Who should register?
Businesses are liable to register for VAT if the taxable turnover of the business in the last 12 months exceeds £83,000 unless they can satisfy Customs and Excise that their taxable turnover in the next 12 months will not exceed the de-registration threshold of £81,000.
The business must notify Customs and Excise within 30 days of the end of the month in which the yearly limit was exceeded and will be registered and required to charge VAT on all your invoices from the beginning of the next month.
There is a penalty of 15% of the net tax due for failure to register, with a minimum penalty of £50.
Registration is done on form VAT1 which can be ordered from Customs and Excise, downloaded from their website at www.hmrc.gov.uk or complete the form online.
A business can voluntarily register if it makes taxable supplies even though it may be below the statutory limits.
Once it is registered it will charge VAT on its supplies (Invoices) and reclaim input tax that it is charged on purchases. This would be beneficial if all or the majority of its customers are VAT registered but not if it deals mainly with the general public. By registering it will have the administrative burden of complying with the VAT scheme and therefore this may not be worthwhile even if there is a cost advantage.
Intending Trader Registration
If you have started in business but are not currently making taxable supplies but intend to do so in the future, you may apply for registration and Customs and Excise are required to register. This enables you to recover any input tax even though no supplies are being made.
Cancelling a VAT Registration
There are a number of situations where a business can apply to cancel its VAT registration
- The business stops making taxable supplies
- The legal status of the business changes e.g. a sole trader becomes a limited company. The old registration will be cancelled and a new one applied for. The new legal entity can retain the previous registration number by completing form VAT68. (If the new legal entity is a partnerships it will also need to complete form VAT2)
- The business can satisfy Customs and Excise that its taxable turnover in the next twelve months will be below the current VAT de-registration threshold of £81,000.
- The tax-exclusive turnover of the business in the past 12 months has been below the current registration threshold of £83,000.
- The business turnover exceeds the registration threshold but its taxable supplies are wholly or mainly zero-rated
- If the business is sold and the new owner does not wish to retain the registration number