VAT – What does it mean?
VAT (Value Added Tax) is a general tax that is added to the value of the goods or services that someone provides. VAT is applied to goods or services that are bought or sold for consumption or use in the European Union. When charging VAT, a business charges the tax based on a percentage of the product’s or service’s sale price.
- How VAT works in the UK
- Should I charge VAT?
- UK VAT rate
- What you must do when charging VAT
- When not to charge VAT
- HMRC VAT Invoice Requirements
How VAT works in the UK
You can only charge your customers or clients VAT if your business has been registered for VAT.
VAT is typically charged on the following things:
- Business sales – when services or products are sold
- Selling business assets
- Hiring or loaning out goods to someone
- Items that are sold to your employees – such as meals sold in the canteen
- Non-sales – such as gifts, part-exchange and bartering
All of the above elements are known as ‘Taxable supplies’.
Should I charge VAT?
You cannot charge your customers VAT unless you have already registered for VAT and have a VAT number. You need to apply to HMRC in order to do this. Only those who are registered and whose application for VAT has been accepted can charge their customers. This is because VAT has been made to be paid by the end consumer, in other words, the individual who pays for the items.
You only charge VAT if your business is making more than £85,000 per year (VAT registration threshold in the UK as of April 2018). If you are making more than £85,000 per year you need to register for VAT. However, not all the sales of services or goods are subject to VAT. Some essential goods and services such as electricity that supplies homes have a reduced rate of VAT.
UK VAT rate
The standard VAT rate in the UK is 20%, however, there are different rates.
|VAT Rate||Percentage of VAT||The Rate Applies To:|
|Standard Rate||20%||Most goods & services|
|Reduced Rate||5%||Some goods & services such as electricity|
|Zero Rate||0%||Food & children’s clothes|
What you must do when charging VAT
When you are charging your customers VAT you need to make sure you know which rate you should charge them. When you have charged your customers correctly you can claim the VAT on your purchases.
If a transaction is either a standard rate, reduced rate or zero rate taxable supply it’s essential that you charge the correct rate, determine whether you’re charging the right amount of VAT if a single price is shown. You must also add all of the VAT information to your invoice and show the transaction in your VAT account. You must also show the amount of VAT you have charged on your VAT return.
When not to charge VAT
You should not charge VAT on items that are known as ‘Out of scope’ items or those which are exempt from VAT.
Items outside the scope of UK VAT consist of:
- Statutory fees such as congestion charges
- Goods or services that are purchased and used outside of the EU
- Charity donations if you do not receive anything in return for the donations
- Goods that you sell as part of a hobby such as a collection of vases
Exempt goods and services consist of:
- Health services that have been provided by doctors
- Postage stamps
- Food and drink
- Plants and seeds
- Animals and animal feeds
- Take-away food
HMRC VAT Invoice Requirements
To create a valid VAT invoice, you will need to add:
- A unique invoice number
- Your business name
- Your business’ address
- Your VAT number
- The date
- The time of supply or tax point if it is different from the date of the invoice
- The customer’s trading mane or name
- The customer’s address
- Description of goods or services
- The total amount excluding VAT
- The total amount of VAT
- The price per item or service excluding VAT
- The Quantity of each type of item
- The rate of any discount per item or items
- The rate of VAT charge per item – if an item is exempt from VAT or it is zero-rated you need to mention this on the invoice
- The total amount including the VAT
If different items have a different rate of VAT, you will need to show the rate for each of the items.
You might wonder what such an invoice might look like. Check our sample invoice here. >>
In this article, we answered the most common questions about charging VAT. If you have further questions, check the HMRC VAT Guide (VAT Notice 700) or let us know in the comment session below!