In this article, I will take you through VAT rates and some things that don’t include VAT. I will introduce you to what you can and can’t claim for VAT. Then we will cover keeping business records. There is a lot more specific information on the GOV.UK and HMRC websites. If you want to look at detailed information you can refer to VAT notices on the HMRC website.
What's Covered on this Page
Who can Charge VAT
Only a VAT-registered business can charge VAT to its customers and may be able to recover any VAT paid on its business purchases. This means that you may receive receipts that don’t show VAT. This is because the business issuing them is not VAT registered. It’s important to remember that your business can only claim back VAT it has been charged. We will look at receipts later.
It is important that you understand there are different rates of VAT depending upon what the item or service is. The current rates are standard rate of 20%, the reduced rate of 5% and a zero% rate. The standard rate is applied to most supplies of goods and services unless they are listed under other rates or categories of VAT. The standard rate is currently 20%. The reduced rate covers a wide range of items including domestic fuel and power, stop smoking products, and children’s car seats. You can find more information about other products charged at the reduced rate by visiting the HMRC website.
The Zero Rate VAT
The final rate of VAT is zero rate. This covers basic food items, children’s clothing, books and newspapers, and most public transport. The zero rate is a taxable rate of VAT, even though it is at zero. Each of these rates of VAT, that is standard rate, reduced rate and zero rate, are known as taxable supplies. It is important that you always make sure you are using the right rate. Some things
are exempt or outside the scope of VAT. Items that are exempt from VAT include financial services, insurance and betting.
In addition to financial and insurance services there are other goods and services exempt from VAT, such as education, training, and charitable fund-raising events. If all of the goods and services you sell are exempt, your business is exempt and you won’t be able to register for VAT. This means you won’t be able to claim back any VAT on your business purchases. Exempt supplies are not taxable for VAT. So you do not include sales of exempt goods or services in your taxable turnover there is no VAT to reclaim.
Outside the scope of VAT
There are some things that aren’t in the UK VAT system at all – they’re outside the scope of VAT. Let’s have a look at items outside the scope of VAT. Some goods and services aren’t covered by the UK VAT system at all – they’re outside the scope of VAT. You don’t charge VAT on goods or services that are outside the scope of VAT. Some are obvious. For example, if you buy and sell goods abroad, you do not have to pay United Kingdom VAT because the goods have not been supplied in this country.
In addition, there are special rules for deciding where certain services must be taxed when they are performed outside the UK or are supplied to a customer outside the UK. You will find information about this in Notice 741 Place of supply of services. But supplies can be “outside the scope” even if the transaction takes place here. For example, if you own a shop and sell some furniture privately from the flat above the shop, the supply is outside the scope of VAT. This is because the sale of things that have never been used in your business is not a business sale. They are
not taxable supplies and no VAT is charged on them. Items that are outside the scope of VAT include non-business activities like a hobby – for example, you might sell some stamps from your collection and fees that are fixed by law – known as ‘statutory fees’. These cover the congestion charge, vehicle MOT tests, and tolls for bridges, tunnels and roads. This means that no VAT is added
to them. This may seem to be the same as the zero rate, but there is an important difference.
If something is zero-rated when you sell it you can still claim the VAT paid on the purchase of that item. Now that you are VAT-registered, remember that when you sell goods and services to your customers you need to add VAT, at the right rate, to your selling price. Even if you have registered voluntarily and your ‘taxable supplies’ are below the VAT threshold you’ll still need to add the VAT to all your taxable sales. Here’s an example which shows how easy it is to calculate the VAT on sales. The items are selling for £20 each. The standard rate of VAT is due, so you add 20% to the selling price. This is £4 so the total selling price becomes £24. You can also see that the VAT due to HMRC is £4. In this example the goods sold are at the reduced rate, 5% VAT. The selling price is still £20 but now the amount of VAT due is £1. The total price to the customer is £21 and the VAT due to HMRC is £1. Sometimes you may have a final price that you have been charged as a customer, or you have given a client a special price.
Now you need to work out the VAT included in the total selling price. An easy way to do this is to use the VAT fraction. VAT fractions change when the VAT rate changes. The current fraction for the standard rate of VAT (20%) is one over six or one sixth on a VAT inclusive price. Here the rate of VAT is 20% and the total price, including VAT is £120. If we multiply £120 by one sixth the result is £20. This is the VAT included in the total selling price. The price before or excluding VAT is £100. Now let’s look at the reduced rate fraction. For inclusive prices using the reduced rate of 5% the fraction is one over twenty one. This is a similar calculation but here we know the rate of VAT is 5% and the total price, including VAT is £105. If we multiply £105 by one over twenty one the result is £5. This is the VAT included in this selling price. The price before or excluding VAT is £100. If this seems a lot to remember you can visit the GOV.UK website.
VAT and Invoices
Now we are going to look at two types of invoices that you can come across in your day to day transactions. There are different kinds of VAT invoice a VAT-registered business can give to customers. Most invoices need to include your VAT number, business name and address, the invoice number, the invoice date, the date of supply, your customer’s name or trading name and address, a description of the goods or services supplied to the customer and the rate and amount of VAT. This invoice has the following aspects highlighted. Invoice Number. You need to pick a system and stick with it — once you’ve issued lots of invoices it’ll be a huge hassle to change. PO Number. This stands for Purchase Order Number, essentially meaning “Your reference”. If you are dealing with a big company they may give you a Purchase Order number, so fill it in here to help tie your invoice to the entry on their system.
Reference. This is another method of tying this invoice to the corresponding payment on your client’s system. Tax Date. Enter today’s date or the date the work was completed. Terms. This is the period within which the client must pay the invoice. Commonly 28 days (four weeks) or one calendar month. Payment Due By. This is the date by which the invoice must be settled. You may receive invoices that show just the gross figures (with VAT included), for instance a till receipt. You may have thought of issuing this type of invoice yourself but it only can be used for retail sales of £250 or less. Simplified VAT invoices only need to show the seller’s name and address, the seller’s VAT registration number, the time of supply and a description of the goods or services. Also, if the sale includes items at different VAT rates then your simplified VAT invoice must also show the total price including VAT, and the VAT rate applicable to the item. If you accept credit cards, then you can create a less detailed invoice by adapting the sales voucher you give the cardholder when you make the sale. You do need to keep copies of any less detailed invoices you issue.
Do not confuse simplified invoices or till receipts with those you may get from businesses that are not registered for VAT. Only a VAT-registered business can charge you VAT and businesses can only claim VAT that they have been charged. Depending upon your business the rate of VAT you charge your customers can be different from the rate your suppliers charge you. If you have registered voluntary for VAT then you will have to charge the appropriate rate of VAT on the goods you sell or services you provide. Let’s look at how this works.
Here’s Helen, she makes children’s clothes which are zero-rated. Her business costs for the materials she uses in making the clothes andother costs like heating and lighting will
have included VAT at the appropriate rates.
The children’s clothes which Helen makes are zero-rated as already mentioned, but as she is VAT-registered she can claim back the VAT on the fabrics she buys to make them, even though she doesn’t charge VAT on the sale of the finished clothes to her customers.
Some of the terms you will often hear in VAT and see on the VAT return are Inputs, Outputs, Input Tax and Output Tax. What are they? Inputs are things you buy for your business. Sometimes you will sell them on to your customers and sometimes you will use them in your business.
Input tax is the amount of VAT on these purchases. So inputs are the things moving into your business. Outputs are the things you sell to your customers and output tax is the VAT you add to the value of your sales at the correct rate. So outputs are the things you move or sell out of your business. The amounts of input and output tax you charge or are charged are what you include on your VAT returns.
Some things you cannot normally claim back include things purchased before you became VAT-registered, things that you use for both personal and business use and motoring fuel. VAT rules for business expenses are sometimes different from income tax rules. Therefore, just because you can claim it for VAT doesn’t mean it’s the same for Income Tax or Corporation Tax. But if you are selling things that are exempt from VAT, for example, insurance, you cannot claim back any VAT on things you buy for your business, because your sales are exempt from VAT. There are a number of situations where you cannot claim back VAT that you’ve paid. These include goods and services that are bought for your personal use, buying cars, business entertainment expenses and business gifts where the cost of all gifts given to the same person is over £50 in the same year.
There are exceptions, so please check the GOV.UK website. You may use some of the goods and services that you buy for both business and non-business use. You normally claim VAT on the proportion of items you use for business purposes. For example, if you buy a computer and use it 50 per cent for your business and 50 per cent for private use, you can claim 50 per cent of the VAT. The rules applying to motoring expenses and road fuel are different.
If your business pays for your car’s road fuel, there are four ways you can deal with the VAT. Reclaim all of the VAT. You need to use all the fuel for business purposes. Where there is both business and personal use you can reclaim the proportion of VAT on fuel used for business mileage. You’ll need to keep detailed records of your business and private mileage for this. Reclaim all of the VAT and pay the appropriate fuel scale charge – this is a way of accounting for output tax on fuel that your business buys but that’s then used for private motoring. Don’t claim back any VAT. This can be a useful option if your mileage is low and also if you use the fuel for both business and private motoring. If you choose this option you must apply it to all vehicles including commercial vehicles.
You may be able to claim back the VAT that you have paid on some goods and services that you have bought before registering for VAT. There are conditions you must meet in order to claim this VAT, including keeping records of what you bought and how you use, sell or dispose of them. You can generally claim back VAT on goods you bought up to four years before you registered for VAT providing you still have them on hand, and services you bought for your business up to six months before registration. Goods include items you have bought to sell to customers and assets, such as computers, to use in your business.
You can only claim back for goods that you still have in the business. You can’t claim VAT on any goods where you have completely just your next VAT Return if your error amount is up to 1% of your box 6 figure (up to a maximum of £50,000). You must report the error to HMRC if it’s above these thresholds. You must report deliberate errors separately – you can’t include them in this calculation. If you discover an error made more than four years ago you have to report this separately as well. When you submit your next return you make the adjustment by adding the net value of the error to the appropriate boxes on the return. You must keep details about the inaccuracy — for example, the date it was discovered, why it happened, how you corrected it, when it happened and include the value of the inaccuracy in your VAT account. There is detailed guidance on correcting your VAT Return in the HMRC notice 700/45. You can also contact the VAT Error Correction Team if you need help making corrections.