This article is to cover some useful information about value added tax (VAT). The
article covers what VAT is, the different types of VAT, when to register a business for VAT and when to charge VAT.
In summary, VAT is a tax paid by consumers on the payment of certain products or services. VAT is charged onto the price of products and services sold in the United Kingdom and some EU countries. All VAT received by a business is payable to HM Revenue & Customs (HMRC).
Types of VAT:
A business charges VAT on goods and services at Standard rate, Zero rate or Reduced
Standard rated: Most goods and services are standard rated which means a business adds
20% to the selling price of the goods and services sold. A business must charge this rate unless the goods or services are classed as reduced or zero rated.
Zero rated: Zero rated means that the goods are still VAT-able, but the rate of VAT to charge your customers is 0%. Examples of zero rated goods includes books, newspapers, children’s clothes, and many more.
Reduced rate: Reduced rate means VAT charged on some goods and services is 5%. Not all goods and services are VAT-able. Some goods and services are exempt from VAT i.e. VAT is not charged. For example, insurance is VAT exempt which means there is no VAT charged on sale of insurance products. Some goods and services are outside the scope of VAT which means they fall outside the UK VAT system.
A business can register for VAT if their turnover is below £83,000 but a business has to register for VAT under compulsory VAT registration if it is over this in any consecutive 12 month period. VAT taxable turnover is the total value of goods or services sold that has a VAT rate of 0% or more and that isn’t exempt from VAT. A business must also register if it receives goods in the UK from the EU worth more than £83,000 or it expects to go over the threshold in a single 30 day period. Once a business is VAT registered they have to charge VAT on the sale of goods and services and they can claim for any VAT that they have paid on expenses for the business.