You are probably familiar with VAT. VAT stands for Value Added Tax. You pay VAT attached to every purchase of a product or service you make as a consumer. As a business owner VAT can quickly become much more confusing. However it’s important to understand the VAT on goods and services that you sell and how to charge it both within the UK and abroad. In the UK, VAT on goods and services is charged at 20% on everything that we buy as consumers or sell as a business. But how does it work? Why is it necessary? Are there occasions when it is not appropriate to charge VAT? We have written this guide to help understand VAT.
What is VAT?
VAT is a consumption tax applied to goods and services that are traded either internally or overseas. Each nation’s government decides how much VAT is charged on goods and services consumed in their country. VAT is designed to apply to all stages of the supply chain from purchasing raw materials right the way through to retail sales. While this may imply that it only applies to physical goods, in fact it also applies to services. For example things like legal counsel, accounting services or any other consultancy will also charge VAT on the services that they provide to the general public. It also applies to the hiring or loaning of goods, the selling of business assets, commissions and finder’s fees, and anywhere where taxable supplies are bought, sold or loaned.
How Does VAT Work?
Elsewhere in the world sales tax is charged instead of VAT, such as the United States. In the US the sticker price of goods doesn’t include the cost of sales tax. Sales tax is added on at point of sale to determine the gross cost. This means that as a consumer you need to calculate the total cost comprising the value of the item plus the sales tax, to determine affordability, before you commit to pay. Here in the UK VAT registered businesses and service providers incorporate the VAT into the sticker price of goods and services sold or hired. This means that as a consumer you are presented with the total cost inclusive of the VAT on goods and services that you purchase. Very often the VAT will be detailed on your invoice, however for smaller daily items it is commonly assumed that VAT is included in the sticker price.
VAT on Goods and Services in the EU
VAT is a destination-based tax. This means that VAT is charged in the country where the product or service is destined i.e. where the final consumer uses this product or service. As opposed to applying a VAT charge in the country in which goods (or parts thereof) may have been produced. VAT is chargeable on most sales and purchases of EU-based producers. VAT is chargeable on most sales and purchases of goods within the EU. The EU has standard rules on VAT, but these rules may be applied differently in each EU country. In most cases VAT on goods and services is charged at all stages of the supply chain including the sale to the final consumer. This includes from the beginning to the end of a production process, e.g. buying components, transport, assembly, provisions, packaging, insurance and shipping to the final consumer.
Why do we need VAT?
VAT is designed to generate revenue for the government, just like any other tax. Tax is used to pay for healthcare, education, transportation as well as National Debt Interest and defense. You can read the government’s latest breakdown of spending here. In the UK, VAT on goods and services accounts for the largest proportion of the government’s income, equalling more than corporation tax and fuel duties added together. In theory the frequent buying and selling of goods and services can generate economic wealth which the government can then channel into creating a healthier, wider economy. Whilst VAT is intended to facilitate economic growth, some claim that it encourages wasteful government spending.
When Should I Register for VAT?
If your earnings are below £85,000 per annum you are not legally required to register for VAT. For SMEs and sole traders registering for VAT may create more problems than it solves as it makes your accounting and bookkeeping more complicated. There are some exceptions to this rule though. If, for example, you trade predominantly in goods that are 0% VAT such as books, baby supplies or children’s clothing it’s a good idea to be VAT registered as you will be able to reclaim VAT on your business expenses but won’t have to charge your customers VAT. However, if you deal exclusively in these goods you will not be allowed to register for VAT.
Reclaiming and Recording Your Businesses VAT
If you sell products or services within the UK you have to register for VAT if you expect your earnings to exceed £85,000 per annum. However it may benefit your business to register for VAT when your earnings are below this threshold. Prestige Business Management can offer guidance in this area. When you register for VAT you can claim back the VAT on goods and services that you have paid out on the essentials you need to run your business. This could be on what you spend on infrastructure such as shopfitting costs, furniture, IT equipment etc. You may also reclaim VAT incurred in the production of goods you sell. For example, if you design and build furniture, VAT charged on the components that make a piece of furniture can be reclaimed. These are called “input” taxes. If you choose to register for VAT you must charge it on all of your goods and services. As part of your usual business accounting, you must provide HMRC with details of how much VAT you’ve charged and how much VAT you’ve paid every 3 months through your VAT Return. This period of time is known as your ‘accounting period.’ You must account for VAT on the full value of what is sold even if you haven’t charged VAT to the customer. You must also account for VAT even if you receive other goods or services as remuneration (e.g. a part exchange). You must submit a VAT Return even if you have no VAT to pay or reclaim. The VAT Return records things for the accounting period like:
- your total sales and purchases
- the amount of VAT you owe
- the amount of VAT you can reclaim
- what your VAT refund from HMRC is
UK VAT Rules
Under VAT rules in the United Kingdom, VAT is charged on most goods and services sold within the UK and the EU. VAT is charged to a business when it brings goods into the UK. Goods exported to non-EU countries and EU businesses by a UK business are zero-rated, which means that UK VAT is not charged at the point of sale. In the case of services the “place of supply” rules determine which country you may need to charge and account for VAT.
Importing Goods From the EU
The existing regulations for imports from non-EU countries now also apply to imports from the EU, with some adjustments. The government introduced ‘postponed accounting’ for import VAT on goods brought into the UK, from 1st January 2021. This means that businesses VAT registered that import goods to the UK can account for import VAT on their VAT return, rather than paying import VAT on or soon after the date that the goods arrived at the UK border. This relaxation applies to imports from the EU and non-EU countries, however, customs declarations and the payment of any other duties are still required. Customs duty tariffs are applicable to some goods and excise duties continue for tobacco, alcohol and certain energy products. It’s possible to defer customs and excise duty payments and settle these monthly with a duty deferment account. To open a duty deferment account, businesses need to register with HMRC and will need to provide a bank guarantee. From 1st January 2021, VAT on imported goods up to a value of £135 is collected at the point of sale, rather than the point of importation. That means that UK supply VAT, rather than import VAT, applies to these consignments. Online marketplaces (OMPs) that facilitate the sale of imported goods, are required to collect and account for the VAT, even when the goods are in the UK at the point of sale. When goods are bought from overseas and sold directly to UK consumers, it’s the overseas seller who is required to register and account for the VAT to HMRC. Overseas sellers are also required to account for the VAT on goods in the UK when they are sold directly to UK consumers. B2B sales under £135 are also subject to these rules. Where the business customer is VAT registered they should provide the registration number to the seller, so the VAT will be accounted for by the customer with a reverse charge.
Distance Selling Threshold
You will be aware of the requirement to register for VAT in the country where you have founded your business. You must also register for VAT in any country where you are storing stock, or when you reach the annual threshold limit for distance selling in that country. Each country has their own distance selling threshold. In the UK the distance selling threshold is currently £70,000. So any business based outside of the UK that is trading to UK customers, needs to register for VAT with HMRC when the value of their UK trading reaches more than £70,000 per annum. You can sell goods from the country in which you are currently VAT registered, up to the value of the distance selling threshold in any receiving nation. Beyond this threshold you will need to register and adhere to the VAT regulations of that nation. The EU introduced a uniform distance selling threshold of €10,000 between all member states from 1st June 2021. Each nation still has its own distance selling threshold. Since the UK is outside of the EU, UK businesses are required to register for VAT in each destination country when that nation’s individual distance selling threshold is met.
These are the three different rates of VAT and you must adhere to:
The majority of VAT on goods and services is charged at the standard rate. So this is the default amount you should charge, unless the goods or services are classified 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.
It depends on what the item is as well as the circumstances of the sale, to determine
when to charge this rate. For example children’s car seats and domestic fuel or power are always charged at 5% but 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-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. Some examples are books and newspapers, children’s clothes and shoes and motorcycle helmets. Also at zero rate are most goods you export from the UK to a country outside the UK. Remember you are required to pay VAT in the destination country. UK businesses exporting zero-rated goods to EU businesses need to retain evidence to prove that goods have left the UK. Such evidence was already required for exports to non-EU countries.
Goods that are VAT Exempt
It’s worth remembering that some goods are VAT exempt. This varies slightly from country to country, so you will need to check how this applies in the destination country. However the UK’s VAT exempt goods are a reliable baseline. If all the goods and services you sell are exempt, your business is exempt and you will not be able to register for VAT. This means you cannot reclaim any VAT on your business purchases or expenses. If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.
Exempt goods and services
There are some goods and services on which VAT is not charged, including:
- insurance, finance and credit
- education and training
- fundraising events by charities
- subscriptions to membership organisations
- selling, leasing and letting of commercial land and buildings – this exemption can be waived
These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes. And if you buy exempt items, there is no VAT to reclaim. Exempt items are different from zero-rated supplies. In both cases VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT – at 0%.
Do I Charge VAT on Internally Sold Items?
Let’s say for example that your business has a small office based in France. If you make an internal sale to a French employee, you may wonder whether this is subject to VAT. This may include the employee buying an item you supply such as an item of clothing for personal use or it may even include an item she buys in the workplace canteen. In both cases, a VAT charge would be applicable. Even though the sale is made within your organisation it is still subject to normal taxation within its destination country.
EU VAT on Services
If you supply services from the UK that come under use and enjoyment rules and are effectively used and enjoyed outside the UK, they will be outside the scope of UK VAT. Also business to consumer supplies of a professional, technical and intangible nature are outside the scope of UK VAT. If you’re supplying services that are treated as supplies from the UK to consumers outside the UK, your services are supplied where your customer belongs and so will be charged at the local rate. The Tour Operators Margin Scheme will continue to apply to all tour operators located in the UK. The margin on those enjoyed in the UK will remain taxed at the standard rate.
VAT on Digital Services in EU
UK traders are no longer eligible to take part in VAT MOSS. VAT MOSS stands for VAT Mini One Stop Shop which is an option offered by tax authorities in the EU which allows businesses to draw up a single VAT MOSS return that details all the VAT charged to consumers in the EU for sales of digital services each quarter. Eligible businesses then pay the VAT that they owe directly to their own tax authority. If you are selling digital services abroad EU VAT is due on all supplies of digital services to EU consumers, regardless of the value of the sales. You need to register for VAT in the destination country. Any business that sells digital services from the EU to the UK needs to register and account for VAT with HMRC.
At Prestige Business Management we can help your Business
At Prestige Business Management we can help you understand VAT on goods and services. Find out what we can do for you. Call us today on 0203 773 2927.