What is VAT?
VAT (Value Added Tax) is a type of consumption tax. In the UK and the European Union, it is charged on goods and services.
In practice, businesses do not pay VAT – instead it is charged to consumers in the price of goods and collected by businesses, making it an indirect tax. Businesses are then responsible for declaring it to the tax office.
What vat applies in the UK?
There are 3 rates of VAT in the UK:
- 20% – standard rate,
- 5% – Reduced rate,
- 0% – zero rate.
In addition, there are two additional groups of goods and services:
- excluded from taxation (exempt),
- outside the scope of UK VAT.
What rate for which goods/services?
The vast majority of goods and services in the UK are currently taxed at the rate of 20%.
A reduced rate of 5% applies to such things as gas and electricity for domestic use, energy saving products, home improvements, car seats and other products related to child safety.
The 0% rate applies to, among others, most food products, children’s clothes and shoes, printing and publishing services, products for the disabled, or products protecting life or health (e.g. motorbike helmets).
Importantly, from December 2020, the zero VAT rate also applies to books, newspapers and digital magazines. And from January 2021, it also applies to feminine hygiene products.
Excluded from taxation are insurance, financial, postal, educational, medical, hospital and recreational services. On the other hand, road and driving licence tolls and charitable donations, among others, are outside the scope of taxation.
When do you have to start paying VAT in the UK?
If you run a business in the UK, you can always choose to become a VAT payer at any time. However, there are occasions when registration is not a choice but an obligation.
You must become a VAT payer in the UK if:
- your turnover in the last 12 months has exceeded £85,000,
- you expect your turnover to exceed £85,000 in the next 30 days,
- you are taking over an existing VAT registered business and intend to continue trading there,
- you have a business registered outside the UK, but you sell services and goods into the UK and your annual sales have exceeded £70,000,
- you run a business outside the UK but store your goods in the UK.
How to register for VAT in the UK?
If you meet one of the above criteria, you are required to register for VAT within 30 days. You can do this online at the HMRC website. To do this you will need, amongst other things:
- your National Insurance (NI) number or UTR,
- your business registration certificate,
- your business bank account details.
VAT registration options
When registering online you will need to choose one of four options for paying VAT:
- standard accounting scheme – the most commonly chosen quarterly settlement with HMRC. The entrepreneur is obliged to pay VAT as soon as the invoice is issued. They can also reduce it by deducting VAT on purchases.
- VAT flat rate scheme – for businesses with an annual turnover of £150,000 or less. For example: accountants – 14.5%, advertisers – 11%, travel agents – 10.5%, but there is no possibility to deduct VAT from purchases.
- Cash accounting scheme – created for companies that may have problems with liquidity. The obligation to pay VAT on sales only arises on receipt of payment from the customer. Similarly, VAT on purchases is not deductible until the amount due has been paid.
- Annual accounting scheme – allows you to submit one VAT return per year (instead of four) and pay in instalments. This is for companies with a turnover of less than £1,350,000.