What is VAT?
Value Added Tax (VAT) is a tax on the supply of goods and services. It is charged by VAT registered businesses on these goods and services, typically at the standard rate of 20%. VAT is applicable to all standard rated goods from sweets in your local newsagents to a new car.
VAT Registered Business
Any business with a turnover of greater than £83,000 is required to register for VAT. Upon registration, a business is given a VAT number and the business must charge VAT on all its sales. Business with turnover of less than £83,000 are able to register voluntarily.
Reporting to HMRC
VAT registered businesses charge VAT on their sales and collect this from their customers. A business will also pay VAT on its purchases from suppliers and other expenses. The amount of VAT charged to customers is reported to HMRC along with the VAT it has paid to suppliers. The net of the two is paid over to HMRC. If the business has paid suppliers more VAT then it has charged to customers, the difference is due back from HMRC. This is typically reported on a quarterly basis.
Rates of VAT
The standard rate of VAT in the UK is 20%. This rate is applicable to the majority of good and services. There is however a reduced rate of 5% which applies to goods such as children’s car seats and domestic electricity. There is a 0% VAT rate which is applicable to goods such as children’s clothing and motorcycle helmets and services such as new build homes.
Exempt from VAT
Certain goods and services are exempt from VAT. This means that are not subject to any VAT charge. Goods and services which are exempt from VAT include insurance, education and training and subscriptions to professional bodies.