VAT (Value Added Tax)
You can only charge VAT if your business is registered for VAT.
VAT is charged on things like:
- business sales – for example when you sell goods and services
- hiring or loaning goods to someone
- selling business assets
- commission
- items sold to staff – for example canteen meals
- business goods used for personal reasons
- ‘non-sales’ like bartering, part-exchange and gifts
These are known as ‘taxable supplies’. There are different rules for charities.
Responsibilities
VAT-registered businesses:
- must charge VAT on their goods or services
- may reclaim any VAT they’ve paid on business-related goods or services
- must account for import VAT on their VAT return if they use import VAT this way (known as ‘postponed VAT accounting’)
If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.
You may want to appoint an agent to deal with HMRC on your behalf (e.g Elite Accountax)
You must account for VAT on the full value of what you sell, even if you:
- receive goods or services instead of money (for example if you take something in part-exchange)
- haven’t charged any VAT to the customer – whatever price you charge is treated as including VAT
If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.
VAT rates
There are 3 different rates of VAT and you must make sure you charge the right amount.
Standard rate
Most goods and services are standard rate. You should charge this rate unless the goods or services are classed as reduced or zero-rated.
This includes any goods below the distance selling threshold you supply from Northern Ireland to non-VAT registered EU customers. If you go over the threshold, you’ll have to register for VAT in that country.
Reduced rate
When you charge this rate can depend on what the item is as well as the circumstances of the sale, for example:
- children’s car seats and domestic fuel or power are always charged at 5%
- mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home
Zero rate
Zero-rated means that the goods are still VAT-taxable but the rate of VAT you must charge your customers is 0%. You still have to record them in your VAT accounts and report them on your VAT Return. Examples include:
- books and newspapers
- children’s clothes and shoes
- motorcycle helmets
- most goods you export from England, Wales and Scotland (Great Britain) to a country outside the UK
- most goods you export from Northern Ireland to a country outside the EU and the UK
- goods you supply from Northern Ireland to a VAT registered EU business – you can check if the VAT number is valid
If you sent goods to the EU from Northern Ireland, you’ll need their VAT number and paperwork proving that the goods have been sent within certain time limits (usually 3 months).
Rates can change and you must apply any changes to the rates from the date they change.
You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases.
If a transaction is a standard, reduced or zero-rated taxable supply, you must:
- charge the right rate of VAT
- work out the VAT if a single price is shown that includes or excludes VAT
- show the VAT information on your invoice
- show the transaction in your VAT account – a summary of your VAT
- show the amount on your VAT Return
You may be able to reclaim the VAT on purchases that relate to these sales.
You cannot claim back all of the amount you’ve paid if you pay the wrong amount of VAT on a purchase.
VAT-inclusive and exclusive prices
You’ll need to make a calculation when charging VAT on goods or services, or when working out the amount of VAT you can claim back on items which were sold inclusive of VAT.
VAT-inclusive prices
To work out a price including the standard rate of VAT (20%), multiply the price excluding VAT by 1.2.
To work out a price including the reduced rate of VAT (5%), multiply the price excluding VAT by 1.05.
VAT-exclusive prices
To work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2.
To work out a price excluding the reduced rate of VAT (5%) divide the price including VAT by 1.05.
When not to charge VAT
You cannot charge VAT on exempt or ‘out of scope’ items.
Exempt goods and services
Exempt goods or services are supplies that you cannot charge VAT on.
If you buy or sell an exempt item you should still record the transaction in your general business accounts. Examples of exempt items include:
- insurance
- postage stamps or services
- health services provided by doctors
Get a list of goods and services that are VAT exempt.
VAT registration
Businesses that sell only VAT-exempt goods and services cannot register for VAT.
If you start selling items that aren’t exempt, you can register for VAT voluntarily. You must register if the total value of non-exempt goods and services goes over the VAT taxable turnover threshold.
Out of scope
Some goods and services are outside the VAT tax system so you cannot charge or reclaim the VAT on them. For example, out of scope items include:
- goods or services you buy and use outside the UK
- statutory fees – like the London congestion charge
- goods you sell as part of a hobby – like stamps from a collection
- donations to a charity – if given without receiving anything in return
Charging VAT to charities
As a VAT-registered business, you can sell certain goods and services to charities at the zero or reduced rate of VAT.
It’s your responsibility to check the charity is eligible, and to apply the correct rate.
Community amateur sports clubs (CASCs) don’t qualify for VAT reliefs for charities.
Check the charity is eligible
To make sure the charity is eligible, ask them for:
- evidence that they’re a charity
- a written declaration or ‘certificate’ confirming they meet the conditions for the particular VAT relief
Evidence of charitable status
The charity should give you either:
- their Charity Commission registration number
- a letter of recognition from HM Revenue and Customs (HMRC) if they’re not registered with the Charity Commission for England and Wales (for example if they’re a Scottish or Northern Irish charity)
Written declaration
Charities are legally required to give you an eligibility certificate when you supply eligible building or construction services to them at zero VAT. The certificate must contain specific information.
A declaration is not legally required for other items you sell at the zero or reduced rate, but you should ask for one to prove the charity is eligible for the relief.
These sample declarations contain examples of the information a charity should give you when buying:
- medical and scientific equipment, motor vehicles and computer software
- charity advertising
- goods and services for disabled people
The written declaration should be separate from the order form or invoice for the goods or services the charity is buying.
You must keep the completed declarations for at least 4 years.
Items that qualify for the reduced rate
You may be able to apply the reduced VAT rate when you sell fuel and power in certain circumstances to an eligible charity.
Items that qualify for the zero rate
You may be able to apply the reduced VAT rate when you sell fuel and power in certain circumstances to an eligible charity.
Items that qualify for the zero rate
You may be able to apply zero VAT when you sell the following to an eligible charity:
- advertising and items for collecting donations
- aids for disabled people
- construction services
- drugs and chemicals
- equipment for making ‘talking’ books and newspapers
- lifeboats and associated equipment, including fuel
- medicine or ingredients for medicine
- resuscitation training models
Equipment for medical and veterinary use
You may also be able to zero-rate some other medical and veterinary equipment when you sell it to:
- certain health bodies, for example NHS Trusts
- not-for-profit research institutions
- charities that provide institutional care, or medical or surgical treatment for chronically sick or disabled people
- charities that provide transport services for disabled people
- charities that provide rescue or first aid services to humans or animals
- someone buying it specifically for donation to one of these bodies
The money used to buy the equipment must be from charitable or donated funds. This should be stated on the eligibility declaration.
The eligible items include:
- medical, veterinary and scientific equipment
- goods for disabled people
- motor vehicles for medical use
- rescue equipment
- resuscitation training dummies
- ambulances
Returned goods
When you return goods to a supplier or a customer returns goods to you, the balance of payment can be settled by issuing either a:
- replacement invoice
- credit or debit note
If you exchange the goods for goods of the same value you don’t need to issue a new VAT invoice.
Credit and debit notes
These must show the same information as the VAT invoice and:
- why it was issued
- the total amount credited, excluding VAT
- the number and date of the original VAT invoice
Discounts and free gifts
Discounts
VAT may have to be charged on discounts and deals.