Value-Added Tax or VAT is a highly recognizable form of consumption tax that can be encountered in most of the countries around the world. This indirect tax is present in a form of levy on the purchase of all sorts of taxable supplies, namely goods and services, which can be applied at different rates depending on country and type of supply involved. In UK national taxing authority is HMRC (His Majesty’s Revenue & Customs), which is worth attention as tax related matters including VAT are within jurisdiction of this authority.
How does VAT work?
VAT is a type of indirect tax, which while it is paid by the company subject to VAT on sales of goods or services, the costs are covered by the customer or to be precise the consumer of goods. Essentially, the cost of VAT tax is included in the price of goods, which means that product that underwent multiple phases of transformation will be taxed at each stage of sale and cost of the tax recovered from the buyer, however the tax paid at each stage will not be paid again, therefore at each stage only added value of the good is taxed, with final buyer – the consumer paying the full price of product including VAT. To illustrate (imaginary case):
- Materials: Base price – 10, VAT (5%) – 0.5 (0.5 paid to the authorities), Total price – 10,5
- Product from manufacturer: Base price – 20, VAT (5%) – 1 (0.5 paid to the authorities), Total price – 22
- Product sold in shop: Base price – 30, VAT (5%) – 1.5 (0.5 paid to the authorities), total price – 31.5
- Price paid by the final buyer – 31.5
This bring another topic – at what rate is one supposed to be charging VAT applied to sold products?
In UK VAT rates are available in four constant variants, with temporary ones being introduced by the UK government, when circumstances calling for it arise. The rates and goods assigned to them may be subject to change, here we present VAT rates as they are at the moment of writing this article.
- Standard VAT rate – 20%
- Reduced VAT rate – 5%
- Zero VAT rate – 0%
Standard rate of VAT is applicable to most of goods and services, if product is not subject to reduced or zero rate and it is not within exempt from VAT category, then it is surely subject to this rate of VAT.
Reduced rate of VAT applies to certain goods and services such as:
- Fuel and electricity for home heating
- Children related products such as children car seats, carry cots and safety seats
- Goods and services related to installation of heating equipment, connection of gas supply or security devices for recipients of benefits or senior citizens, if they are funded by grants
- Mobility aid specifically designed for the elderly
- Products related to discontinuing smoking – nicotine patches, etc.
- Contraceptive products, that are not supplied by institution regulated by state (or hospital) as part of medical treatment
Certain products belong to the zero-rated category, such as:
- Various basic food products
- Printed items, such as books, newspapers, etc. Electronically supplied books, newspapers, periodicals and items of similar nature are also qualified under condition of not being composed predominantly of video or audio content and advertisements.
- Audiobooks and wireless sets for people with visual disabilities.
- Prescribed drugs and aids for people with disabilities
- Advertisements for charity
- Clothes and footwear for children
- Protective equipment
- Sanitary products for women
Finally, some products may be exempt from VAT, such as:
- Dental services
- Medical services, under condition that they are provided by professionals
- Hospital, medical and diagnostic services along with goods and services related to the rendered service by public institutions
- Educational services
- Financial services, such as banking, insurance, etc
Please be informed, that above list serves as example and does not involve details – certain products belonging to listed category may be subject to a different VAT rate due to their interpretation or certain circumstances i.e. milk being a basic food – 0%, while ice cream – 20%.
Temporary VAT rates may be present in a form of a completely different VAT rate, i.e. 12,5%, or in temporary reassignment of certain products to a different VAT rate category for limited period of time, as an example might serve installation of energy saving materials which from 1st April 2022 until 31st March 2027 belong to zero-rated category, but after that date it will return to reduced VAT rate of 5% due to the Value Added Tax (Installation of Energy-Saving Materials) Order 2022 which extended and modified this VAT relief.
It is very important to always be aware of the current VAT rates, as they are not a constant categorization and a inattention might bring about an unpleasant surprise after applying incorrect rate. Furthermore, being aware of changing tax rates might be an opportunity, as changes usually occur due to circumstances, which by itself might be an opportunity for an attentive entrepreneur.
How to pay VAT?
There are more than just a single way to pay your VAT bills and those are:
- Debit or Credit Card (through your online HMRC account)
- Online or telephone banking
- Through your bank or building society – requires payslip from HMRC (issued after application)
- Standing order
- Direct debit
VAT number and VAT registration
There is no doubt that VAT number is important, it is required for all sorts of procedures that are vital for the purposes of VAT compliance. UK VAT number consists of the country code GB and 9 numbers, however if your business is located in Northern Ireland and you trade with clients in member states of the EU, your country code will be XI instead. In order to receive VAT number you need to register for VAT, which bring about another issue – when is VAT registration necessary?
For companies based in UK, there is a threshold to register for VAT, upon exceeding which it is required to register for VAT purposes. In 2023 VAT threshold in UK is £85,000.00 of turnover in 12 months, after exceeding this value one must register for VAT. Being VAT registered is not something that can only occur after crossing that threshold – it can also be done voluntarily.
One thing to remember for all who are considering starting a business in UK is the perspective of submitting VAT returns in UK and the fact that UK has introduced Making Tax Digital for VAT, which means having to keep digital records and filing tax returns through compatible software.
If one would like to find more information about VAT, there is plenty of tools available, i.e. VAT calculators for certain tax schemes. Furthermore there is no reason for interested parties to not keep up to date with news regarding VAT legislation, as certain changes might have a lot of influence towards their area of business activity. For example, January 2023 has introduced a new penalty system for late VAT returns in UK, while February 2023 had HMRC implementing changes to the opting to tax and EU excise duty processes. Nearly every month brings about some changes and being familiar with them can help avoid many issues, although not all of them may concern party in question.
An alternative to dealing with VAT in DIY style is requesting help from experts, which can certainly help avoid a lot of additional work. There are a lot of accounting firms available on the market, who are more than happy to offer their aid to anyone seeking their services.