In the dynamic world of running a business, your perspective on value-added tax (VAT) undergoes a transformation.
VAT not only influences your company’s accounting and cash flow but also introduces a plethora of compliance factors that demand your attention.
The aftermath of Brexit has brought about a continuously evolving legislative environment for VAT.
This comprehensive VAT guide is designed to equip businesses with the knowledge they need to navigate VAT registration and compliance amidst this ever-changing landscape
What is VAT?
VAT, as a type of consumption tax, applies to the purchase of goods, services, and other taxable supplies. It assumes a significant role for businesses, encompassing various taxable areas that can impact your goods and services. It’s important to note that charities may have distinct VAT regulations tailored to their needs.
However, for most businesses, the following areas are typically subject to VAT:
- Sales of Goods and/or Services: VAT can be charged on the sales you make, including the provision of goods or services to customers.
- Hire or Loan of Goods: If you rent or lend out your goods, VAT may apply to those transactions.
- Commission: If you earn commission through intermediaries or agents, VAT might be applicable to those earnings.
- Exchanges: In cases where goods are exchanged rather than sold, VAT regulations may still apply.
- Staff Sales: Activities such as staff meals or sales to employees may be subject to VAT.
- Business Goods Used Personally: If you utilize business goods for personal use, VAT considerations may come into play.
- Sale of Business Assets: When selling business assets, VAT may be charged depending on the circumstances.
It’s important to recognize that VAT is ultimately paid by the end consumer, not individual businesses. Consequently, VAT is typically included on business invoices. Point of Sale (POS) systems can be programmed to automatically calculate and add VAT to product prices, facilitating the aggregation of VAT amounts.
Although businesses remit VAT payments to Her Majesty’s Revenue and Customs (HMRC), the actual cost of VAT has already been borne by the customer, incorporated within the purchase price of the goods or services. Hence, VAT is an indirect tax, but businesses are still obligated to report it to HMRC.
Read more: What is PAYE
What is the VAT Threshold? When do you need to Register a Business?
Once your business turnover surpasses £85,000, you are mandated by law to embark on the VAT registration journey. This pivotal threshold necessitates charging VAT on all the services or goods your business offers. It’s crucial to remember that VAT can only be levied if you are duly registered to do so. This applies to businesses of all types, whether they are incorporated entities or sole traders, regardless of their obligation to pay corporation tax.
Even businesses with revenue below the threshold can reap advantages by opting for VAT registration. Beyond compliance, VAT registration unlocks the ability to reclaim VAT on purchases of goods and services made by your business. Additionally, it can enhance the perceived credibility and stature of your small business, giving it an air of establishment and professionalism.
What is My VAT Number?
VAT registration bestows upon businesses the privilege of possessing a unique Company VAT number. This exclusive identifier is exclusively granted to VAT-registered enterprises and can be easily located on your business’ VAT registration certificate. This valuable document serves a dual purpose by not only showcasing your Company VAT number but also providing essential details such as the deadline for your initial VAT return submission.
Furthermore, it specifies the precise date when your company exceeded the UK VAT registration threshold, compelling you to undertake the registration process.
What are My VAT Responsibilities?
As a VAT-registered company, you unlock certain obligations and benefits regarding VAT. Charging VAT on your goods or services becomes a requirement, while the ability to reclaim VAT on business-related purchases becomes a valuable advantage. Ensuring compliance, businesses are legally bound to provide a VAT invoice that includes sales tax whenever a sale is made. The only exception to this rule applies to in-person sales, where a receipt of goods is deemed sufficient. Nevertheless, businesses are obligated to furnish a VAT receipt upon customer request.
VAT charged by your business is calculated based on the total value of the goods or services being sold. This applies even if your operations involve exchanges or part-exchanges. If you charge customers without including VAT, the price you do charge will still be considered inclusive of VAT by HMRC.
VAT-registered businesses must dutifully report the VAT they have charged or paid to HMRC through regular VAT returns, typically submitted every three months. Even if you have no VAT to report for a specific period, completing the return remains mandatory.
In the event of overcharging VAT to customers, the excess amount must be remitted to HMRC. Conversely, if you have paid more VAT than you have charged your customers, the difference can be reclaimed from HMRC. This ensures a fair and balanced VAT arrangement for your business.
What is the Current Rate of VAT?
Stay up-to-date with the latest VAT rates for goods and services in 2024. The current rates remain steady, providing clarity and consistency for businesses. Here’s a breakdown of the rates:
🔹 Standard Rate: 20%
- Applicable to the majority of goods and services, ensuring a standard VAT treatment across various sectors.
🔹 Reduced Rate: 5%
- Reserved for select goods and services, including essentials such as domestic energy bills, residential property conversions, and safety-conscious items like children’s car seats.
🔹 Zero Rate: 0%
- Relieved from VAT entirely, zero-rated goods and services enjoy a VAT exemption. Notable examples include children’s clothing, making them more affordable for families.
By staying informed about these VAT rates, businesses can accurately calculate their VAT obligations and make informed decisions to ensure compliance in the dynamic marketplace.
What is Exempt from VAT?
When it comes to VAT, the rate applied varies depending on the nature of the goods or services you’re purchasing. Additionally, certain items fall under the category of VAT-exempt, as they are considered essential for day-to-day living. Here are some examples of VAT-exempt goods and services:
🔸 Education or Training: Educational courses and training programs are exempt from VAT, recognizing their importance in fostering knowledge and personal development.
🔸 Sporting Activities and Physical Education: Participation in sporting activities and physical education is VAT-exempt, promoting a healthy and active lifestyle.
🔸 Charitable Fundraising: Goods and services related to charitable fundraising activities receive VAT exemption, encouraging philanthropic endeavors.
🔸 Selling or Letting Commercial Properties: Transactions involving the sale or lease of commercial properties are VAT-exempt, facilitating business operations in the property sector.
🔸 Insurance and Finance Services: VAT exemption is granted to insurance and finance services, ensuring accessible and fair financial solutions.
🔸 Postage Stamps: Postage stamps, an essential element of mail services, are VAT-exempt to support postal communication.
For a comprehensive overview of VAT rates corresponding to specific services or products, you can refer to the official government website at gov.uk. This resource provides detailed information, enabling businesses and consumers to navigate the complexities of VAT more effectively
What is the Difference Between ‘Zero-Rate’ and ‘VAT-Exempt’?
Differentiating between zero-rated and VAT-exempt supplies is essential in understanding VAT implications. While zero-rated supplies are charged VAT at a rate of 0%, allowing businesses to recover VAT on their overheads and costs, VAT-exempt supplies do not qualify for VAT reclaims. Here are some examples:
🔸 Children’s Clothing: VAT is not charged on clothing specifically designed for children, helping families access affordable apparel.
🔸 Footwear: Footwear designed for both adults and children is considered zero-rated, making it more accessible to consumers.
🔸 Water: The supply of water, a basic necessity, is zero-rated to ensure its availability without the burden of VAT.
🔸 Basic Unprocessed or Raw Foods: Essential unprocessed or raw food items, such as fruits, vegetables, and grains, are zero-rated to support healthy eating options.
🔸 Books and Newspapers: Reading materials, including books and newspapers, are zero-rated, encouraging literacy and access to information.
🔸 Period Products (as of 2021): Menstrual products have been made zero-rated, aiming to address affordability and promote menstrual health.
It’s important to note that zero-rated supplies are still considered part of a company’s taxable revenue on their tax return. In contrast, VAT-exempt supplies are not included in the taxable revenue calculation. If your business exclusively offers VAT-exempt supplies, you are not required to register for VAT.
Understanding the distinctions between zero-rated and VAT-exempt supplies enables businesses to navigate their VAT obligations effectively and make informed decisions regarding registration and tax reporting.
What Can and Can’t Reclaim VAT On?
Businesses have the opportunity to reclaim VAT on goods and services specifically used for their operations. Reclaiming VAT can be applicable to various expenses, including:
✔ Staff Travel: VAT on travel expenses incurred by staff for business purposes can be reclaimed.
✔ Mobile Service Plans: If mobile service plans are used solely for business-related calls, VAT on these plans is reclaimable.
✔ Business-Only Vehicles: VAT on vehicles exclusively used for business operations can be reclaimed.
✔ Fuel, Accessories, and Maintenance: VAT on fuel, accessories, and maintenance costs for business vehicles is eligible for reclamation.
✔ Utility Bills (Home Business): If you run a home business, you can reclaim VAT on utility bills based on the proportion of usage for business needs.
However, there are certain expenses that are not eligible for VAT reclaims, such as:
❌ Entertainment Costs: VAT on expenses related to entertainment activities is not reclaimable.
❌ Private Use Expenditures: Anything solely for private use, without any business-related purpose, cannot be reclaimed.
❌ Business Assets Transferred as a Going Concern: VAT cannot be reclaimed on business assets transferred to you as part of a going concern.
For more detailed information on VAT reclaims, it is recommended to visit the gov.uk website. This reliable resource offers comprehensive guidance, enabling businesses to understand the specifics of VAT reclaims and ensure compliance with applicable regulations.
Changes to VAT After Brexit
While the domestic VAT rules that impact your business should largely remain unchanged after the UK’s departure from the European Union in 2021, there are notable complexities to consider if you engage in regular import and export activities with the continent. Here are the key changes to be aware of regarding VAT post-Brexit:
1️⃣ Import VAT: Importing goods from the EU now requires paying import VAT at the point of entry into the UK. This ensures that VAT is accounted for in the UK, rather than at the EU’s point of origin.
2️⃣ Export VAT: VAT on goods exported to the EU is generally zero-rated, allowing businesses to sell goods to EU customers without charging UK VAT. However, certain conditions and documentation may be necessary to validate the zero-rating.
3️⃣ VAT on Services: VAT rules concerning the provision of services to EU countries have changed. Depending on the nature of the service, different rules may apply, such as the use of the “reverse charge” mechanism.
4️⃣ EU VAT Registration: If your business is involved in the supply of goods or services to EU member states, you may need to register for VAT in individual EU countries to comply with their respective regulations.
It’s important to stay updated on the specific VAT changes and requirements, as the landscape continues to evolve. Consulting with relevant tax authorities and seeking professional advice can help ensure compliance and minimize any potential disruptions to your business operations in the post-Brexit environment.
New rules around EU import VAT
The UK bid farewell to the EU’s VAT regime in early 2021, marking a significant change in how countries within and outside the EU are treated in terms of value-added tax. This new development ensures that both EU and non-EU nations are on an equal footing when it comes to VAT. As a result, any goods arriving from the EU or any other region are now required to factor in import VAT if their value exceeds £135.
When goods enter free circulation, such as passing through a UK port, they become subject to import VAT. However, you have the flexibility to decide whether to pay the import VAT at this stage and subsequently reclaim it from HMRC using C79 certificates.
Alternatively, since January 2021, the Government has introduced a convenient “postponed accounting” system for VAT. This system grants you the opportunity to account for import VAT using your VAT return, eliminating the need to immediately pay the tax upon the arrival of your goods in the UK and then seek reimbursement.
If your company imports EU goods valued below £135, you can efficiently handle the value-added tax by utilizing the reverse charge procedure and declaring it on your upcoming VAT return. This streamlined approach ensures smooth operations for your business.
Reforms to EU export VAT
If your business engages in cross-Channel trade, it’s crucial to familiarize yourself with the EU export VAT regulations, which took effect in January 2021.
With the new treatment of EU countries on par with non-EU nations, your exports to Europe will be subject to zero-rated UK VAT, resulting in a 0% tax rate. This means you won’t have to pay UK value-added tax on your goods, although you must still include them in your VAT accounting records.
It’s worth highlighting that if you’re directly shipping goods to consumers on the continent, it’s advisable to conduct thorough research to determine whether EU VAT registration is necessary in the countries you serve. This proactive approach ensures compliance with the applicable regulations and facilitates seamless operations for your business.
Why Northern Ireland’s trade rules are different
As part of the negotiated Brexit deal between Britain and the EU, Northern Ireland was granted a unique trade status to prevent the establishment of a rigid customs border on the island of Ireland. It’s essential to consider this aspect when formulating your VAT strategy, and you can find detailed guidance and resources on the official government website to assist you in this process.
By staying informed and accessing the available information, you can effectively incorporate the considerations related to Northern Ireland’s special trade status into your VAT planning efforts
New changes to VAT in 2024
The UK’s VAT laws will see a number of significant adjustments in 2024 as the post-Brexit tax landscape continues to evolve.
Among the VAT changes for 2024 are:
Point-based penalty system
In an effort to enhance compliance and promote timely VAT returns and payments, a new penalty regime will come into effect for VAT periods commencing after 1 January 2023, replacing the previous default surcharge regime. This revamped scheme introduces a points-based system, which aims to encourage businesses to meet their VAT obligations promptly.
Under the new system, points will be assigned for late filing, and when a company accumulates 4 points, a fixed penalty of £200 will be imposed. This approach provides a clear and structured framework to address late filing issues.
Similarly, penalties for late payments will be calculated based on the outstanding VAT amount. If payments remain overdue for more than 15 days, a penalty of 2% of the outstanding VAT will be levied. For payments that exceed 30 days past the due date, a daily rate of 4% will be applied to the outstanding amount.
However, to facilitate a smooth transition for businesses adjusting to the new penalty regime, HMRC has announced that the 15–30-day penalty for late payments will not be charged throughout 2023, unless payments are more than 30 days overdue. This grace period allows businesses to adapt to the changes without facing immediate penalties for certain payment delays
Interest on late payments
From the day a payment is past due until the day the remaining balance is paid in full, interest will now be assessed on late payments. This is determined at the base rate of the Bank of England plus 2.5 percent.
Changes to option to tax processes
Starting from the 1st of February 2023, an array of fresh modifications have been put in place to enhance the VAT option to tax (OTT) procedures. Consequently, HMRC has discontinued the practice of issuing OTT notification letters in response to submissions. Additionally, HMRC will no longer process requests to confirm the existence of an OTT, except in a few specific cases. It is important to note that this exclusion does not apply if the option’s effective date is more than 6 years ago.
These changes have been implemented with the aim of fostering greater accountability among businesses by emphasizing their responsibility to provide accurate information regarding their OTT position. By streamlining the process and placing more responsibility on businesses, these adjustments seek to ensure that the OTT framework operates efficiently and in line with the broader objectives of VAT regulations.
VAT-related payment scheme for used car sales to Northern Ireland and the EU
HMRC has recently updated its guidance concerning the second-hand margin scheme for automotive businesses dealing with vehicles purchased in Great Britain and subsequently sold to Northern Ireland and the EU.
Effective from 1 May 2023, a new second-hand motor vehicle payment scheme will come into effect, introducing changes to VAT-related procedures.
Under the revised scheme, VAT will be charged on the full selling price of the vehicle. However, businesses meeting the following criteria will be eligible to claim a VAT-related payment:
1️⃣ Establishment and VAT Registration: The business must be established and VAT-registered in the UK.
2️⃣ Eligible Vehicle Purchase: The business must purchase a qualifying second-hand vehicle in Great Britain.
3️⃣ Intention to Sell in Northern Ireland or the EU: The vehicle must be transported with the intention to sell it in either Northern Ireland or an EU country.
By meeting these requirements, businesses can benefit from the new scheme, which allows them to claim a VAT-related payment, reducing the overall VAT liability
Retained EU laws to end in December
In line with the Retained EU Law (Revocation and Reform) Bill, VAT legislation and other laws derived from the EU are set to be repealed. Unless specific legislation is retained by ministers, this repeal will apply to all laws.
As a result, further changes to VAT laws are anticipated in 2024 and beyond. These changes have the potential to impact businesses operating in the UK. At our end, we remain committed to keeping our VAT guide up to date with all the information UK businesses need to navigate and understand these future changes.
We understand the importance of staying informed about evolving VAT regulations, and we will diligently monitor developments to provide businesses with the latest insights. Our goal is to equip businesses with comprehensive knowledge and guidance, ensuring they are well-prepared to adapt to any forthcoming changes and maintain compliance in the dynamic landscape of VAT legislation.
By staying tuned to our VAT guide, businesses can access valuable resources and stay ahead of the curve, enabling them to navigate any future changes with confidence.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.