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What is Value Added Tax (VAT)?

by | Nov 5, 2024 | Frequently Asked Questions

What is Value Added Tax

What is Value Added Tax (VAT)?

Value Added Tax (VAT) is a consumption tax that applies to most goods and services sold by VAT-registered businesses. It impacts various transactions, including selling goods and services, hiring or loaning goods, and even non-traditional sales like bartering and gifts.

VAT Registration

Businesses must register for VAT if their VAT-taxable turnover exceeds £90,000 over a rolling 12-month period. Businesses can opt to register voluntarily, even if their turnover is below this threshold. This can be beneficial as it provides incentives, such as reclaiming VAT on business expenses.

Responsibilities of VAT-Registered Businesses

Once registered for VAT, businesses must adhere to several responsibilities:

  1. Incorporating VAT in Prices: You should include VAT in the price of goods and services at the correct rate, to ensure transparency and compliance in pricing.
  2. Maintaining Records: Keep detailed records of VAT paid on purchases to accurately calculate the VAT you owe.
  3. Accounting for Imported Goods: Any goods imported into the UK must have their VAT accounted for accordingly.
  4. Filing VAT Returns: VAT-registered businesses need to submit VAT returns to HMRC usually every 3 months. This report should detail the amount of VAT charged to customers and the VAT paid on business purchases.
  5. Paying Due VAT: If your charged VAT exceeds the VAT you’ve paid, you must pay the difference to HMRC. Conversely, if you’ve paid more VAT than you’ve charged, you can expect a repayment from HMRC.

VAT Rates

  • Standard Rate (20%): Most goods and services fall under this rate.
  • Reduced Rate: For specific goods and services, a lower rate might apply.
  • Zero Rate: Items such as children’s clothes, books and some food items fall under the zero rate, meaning they carry no VAT charge, though they remain VAT-taxable.

Certain items are exempt from VAT or considered ‘out of scope’, which means they don’t involve VAT in their pricing or processing.

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