Value Added Tax (VAT)

VAT is a tax on the final consumption of certain goods and services. We provide a brief introduction to VAT and a guide that provides a summary of the basic principles of VAT.

What is VAT?

VAT is a tax on consumer expenditure. It is collected on business transactions, imports and acquisitions.

Most business transactions involve supplies of goods or services. VAT is payable if they are:

? supplies made in the United Kingdom (UK) or the Isle of Man

? by a taxable person

? in the course of a business

? are not specifically exempted or zero-rated.

What are the VAT rates?

There are 3 rates of VAT:

? a standard rate, currently 17.5%

? a reduced rate, currently 5%

? a zero rate.

Do these rates apply to all goods and services?

No. Some supplies are exempt from VAT, which means that no VAT is payable. Also supplies are outside the scope of VAT if they are:

? made outside the UK and Isle of Man

? not made in the course of business.

How can I find the VAT rate for a particular supply?

You can find details of which goods and services may be zero/reduced rated or exempt in Notice 700: The VAT guide and Notice 701/39: VAT Liability Law. It also tells you where you can find additional information if you are unsure about the liability of a particular supply.



When must I register and start charging VAT?

The supply of any goods and services, which are subject to VAT at any rate are called taxable supplies whether you are VAT registered or not.

If the value of your taxable supplies is over a specific limit, you need to register for VAT, unless your supplies are wholly or mainly zero rated in which case you may apply for exemption from registration. The limits are shown in the supplement to Notice 700/1: Should I be registered for VAT? You may be charged a penalty if you register late. The easiest way to register for VAT is by using our VAT Online Registration Service.



Notice 700/1 also explains how to apply for:

? registration if the value of your taxable supplies is above the limit

? exemption from registration if your taxable supplies are wholly or mainly zero-rated

? exception from registration if you can show your future turnover will be below the ”˜deregistration’ limit

? voluntary registration if the value of your taxable supplies is below the limit for compulsory registration

? registration when you make distance sales to the UK or relevant acquisitions into the UK

? voluntary registration when you make supplies outside the UK that would be taxable if made in the UK.

What happens after I’ve registered?

You need to charge VAT on all your taxable supplies from your date of registration and keep:

? a record of all standard-rated goods and services you supply or receive as part of your business

? a separate record of any exempt supplies you make

? a VAT account.

At preset intervals you need to fill in a VAT Return with details of your sales and purchases. You can do this online or using a paper return. If the VAT on your sales is more than the VAT on your purchases you pay us the difference. On the other hand, if the VAT on your purchases is more than the VAT on your sales you can claim the difference from us.



The Flat Rate Scheme for small businesses simplifies VAT accounting procedures to save you time and money.

You can find further information about the records you must keep in Notice 700/21: Keeping records and accounts and the Flat Rate Scheme in Notice 733.

Online VAT



More and more businesses like yours have already discovered the benefits of signing up for VAT Online Returns.

It’s simple and quick with no more paper VAT returns to fill in and post.

You get an on-screen acknowledgement and a unique reference number, so that you know we have received your details.

You pay electronically by Direct Debit, BACS (Bankers Automated Clearing Services), CHAPS (Clearing House Automated Payment System) or Bank Giro Credit Transfer. You may be entitled to receive 7 extra calendar days from the standard due date for your return and payment to reach us.

? Direct Debit – If you pay by Direct Debit you will receive 7 calendar days from the standard due date for your return to reach us. It will be a further three working days before we collect payment from your bank account. Generally anyone with a UK VAT Registration number will be able to pay by Direct Debit. However, there are a few exceptions, for further information please see our Direct Debit Frequently Asked Questions

? In order to access the Direct Debit service you will need to be enrolled for the VAT Online Return Service. You access Direct Debit via the ’submit returns’ link on the ’my services’ home page. This will take you to the VAT Online Return home page where you will have the option to set up a Direct Debit Instruction online.

? For more information on how to pay your VAT please see the Paying your VAT article.

Other advantages of using eServices include:

? Email alerts to keep you up-to-date on developments that affect your business.

? The ability to request an amendment to a VAT registration online.

? A dedicated eCustomer Support Helpdesk is available to support you with any query relating to the use of new services.



VAT Online Registration Service

What is the VAT Online Registration Service?

It is the electronic version of the Form VAT1 with a more intuitive application that allows you to apply for VAT registration.

At the moment only the Form VAT1 is available online but we will provide links to other forms you may need to complete e.g. Form VAT 2 for partnerships, Form VAT68 for transfers of VAT registration numbers.

Why use the Online VAT Registration Service?

? The service is free and secure

? Quicker than the paper system by avoiding any postal delays

? An agent can fill in the application on your behalf

? On screen help and guidance on how to complete the form correctly

? On screen acknowledgment that we have received your application

? Built in online checks that will help you to fill in the application correctly and should reduce mistakes by linking you directly to information that will help you complete the application accurately

Who can use the service?

VAT Online Registration is available to most businesses not yet registered for VAT. There are a few exceptions, which are listed in the Terms & Conditions.

You may ask an agent for example an accountant, bookkeeper employee etc. to fill in and submit the application on your behalf. In these cases the agent will also need to provide their details.

What will I need before I can sign up to e-Services?

You will need a personal computer (PC) or Apple Macintosh. You will then need to open an Online Government Account and to sign up for VAT Online Services.

You require a Government Gateway Organisation user ID to access the VAT Online Services. If you have an existing user ID then you should use that, if you don’t simply select Sign up, enter your details and set your own password. You must make a note of this user ID, as you will need it every time you access e-services. Please note that you will NOT be sent a copy of your user ID in the post.

Further information on security and technical aspects of the service see FAQ: VAT Online Registration

Is my information secure?

The information you send us is protected by using Secure Socket Layer (SSL) technology (shown by the padlock in the bottom right hand corner of the screen). This shows that your information cannot be intercepted as it travels over the net. Once your information reaches us it is stored behind firewalls to prevent unauthorised access. Please see our Privacy Policy.

Terms & Conditions

Use of VAT Online Services are subject to general Terms & Conditions. You will be asked to confirm you agree to them when using the services for the first time.

There are also specific Terms & Conditions for use of the VAT Online Registration Service

Repayments of VAT to overseas traders

If you are in business and visit the UK in the course of that business you may be entitled to a refund of VAT you incurred whilst here.

Who can use the scheme?

EC traders

If you are registered for VAT in a Member State of the European Community (EC) and you buy goods or services in another Member State of the EC you may have to pay VAT there. This need not happen if you buy goods for removal from the UK, but it may apply if what you buy is used there – for example, if you take part in a trade fair.

You cannot recover VAT paid in another Member State as input tax on your VAT Return but you may be able to use this scheme to reclaim it.

Non EC traders

If you are registered for business purposes in a country that is not a Member State of the EC and you buy goods or services in the UK, you may have to pay VAT. This need not happen if you buy goods for export, but it may apply if what you buy is used in the UK – for example, if you take part in a trade fair.

If you are not registered for VAT in the UK you cannot treat this VAT as input tax but you may be able to use this scheme to reclaim VAT charged on imports into the UK or purchases of goods and services used in the UK.

What form should I use?

If you are a business based within the EC you should use form VAT 65.

If you are a business based outside the EC you should use form VAT 65A.

Minimum standards

Applications for refund of UK VAT by EC and non-EC businesses gives detailed advice on how to make sure your application is accepted.

Providing your bank account details

Providing us with your correct bank account details means a faster and safer way of receiving your refund.

Time limits

There are strict time limits for submitting completed application. The due dates are:

? for applications from EC businesses (under the 8th Directive) 30 June in the year following the year in which the tax was incurred

? for applications from non-EC businesses (under the 13th Directive) 31 December for claims in the prescribed 12 months up to 30 June of that year.

Choose the right VAT scheme for your business

Accounting for VAT in the standard way can be time-consuming and costly for some businesses. However, there are alternative VAT accounting schemes that might suit you better.

This guide will help you decide which of these schemes may be right for your business, whether you are eligible, how to apply and where you can go to get more information and advice. Even out VAT payments and smooth your cash flow: the annual accounting scheme

Under the annual accounting scheme you make monthly or quarterly instalments during the year – which are based on an estimate of your total annual VAT bill. At the end of the year you submit a single annual return and any balance due.

The benefits of this scheme are:

? no big VAT bills at the wrong time because you spread your payments throughout the year

? easier budgeting and cash flow planning because you know how much your instalments are from the start

? less time spent on VAT because you only have to fill in one return a year instead of the usual four

? you get two months to complete and send in your annual VAT Return and balancing payment, instead of one

? you can choose your VAT Return year end to suit your business.

This scheme may not suit you if your business usually gets repayments of VAT, as you will have to wait a whole year for your money.

Who can use the scheme?

? You can use this scheme if your annual turnover (excluding VAT) is not expected to exceed £1,350,000.

? Businesses using the scheme may continue to use it until their annual turnover (excluding VAT) reaches £1,600,000.

Find out more about the annual accounting scheme in Notice 732 Annual accounting.

How to apply for the scheme

To apply for the scheme download form VAT 600 AA and return it to:

Annual Accounting Registration Unit

Deansgate

62-70 Tettenhall Road

Wolverhampton

WV1 4TZ

Note: If you intend to pay by Direct Debit then you must complete and submit a Direct Debit Instruction with your application.

The annual accounting scheme can be used together with the cash accounting, flat rate or retail schemes.

Don’t pay your VAT until your customers pay you: the cash accounting scheme

Under the cash accounting scheme you account for VAT on the basis of payments you receive and make, rather than on invoices you issue and receive.

The main benefit of this scheme is that it helps your cash flow, particularly if your customers pay you late, although it also means you can’t reclaim VAT on purchases until you pay your suppliers.

Who can use the scheme?

You can use this scheme if your annual turnover (excluding VAT) is not more than £660,000 and you meet certain conditions.

You can continue to use the scheme until your annual turnover (excluding VAT) reaches £825,000. You may use the cash accounting basis for a further six months to account for any VAT outstanding on supplies made and received while using the scheme. Any VAT still outstanding at the end of the six month period must be accounted for on the VAT Return ending then.

How to apply for the scheme

You don’t need to apply to use this scheme, and you can change to it at the beginning of any tax period. If your business is already registered for VAT when you start, you must make sure you do not account for VAT twice on any supplies made or received previously.

The cash accounting scheme can be used together with the annual accounting scheme. There is also a cash-based version of the flat rate scheme, which can be used as an alternative to cash accounting.

Find out more about the cash accounting scheme in Notice 731 Cash accounting.

Apply an average rate for simpler VAT: the flat rate scheme

The flat rate scheme is designed to help small businesses by letting you calculate your VAT payment as a flat rate percentage of your turnover. The percentages are decided according to the trade sector your business is in. Under the scheme you will not be able to reclaim any of the VAT you pay, as this is taken into consideration as part of the percentage calculation.

The main benefit of this scheme is that it reduces the time you spend accounting for VAT because you don’t have to record the VAT charged on each individual purchase and sale.

Businesses in their first year of VAT registration can also benefit from a 1 per cent reduction in the flat rate. To calculate this, take off 1 per cent from the flat rate for your sector. For example, if your business belongs to a sector which has a flat rate of 10%, you should apply a flat rate of 9 per cent in your first year.

Who can use the scheme?

You can apply to use this scheme if:

? your annual turnover (excluding VAT) will be £150,000 or less

? your annual total turnover (including VAT) will be £187,500 or less.

For the second test above, ”˜total turnover’ is the value (including VAT) of all your business supplies, including any exempt and non-business income. Non-business income is only included for deciding whether you can join the scheme. It will not be used to work out how much VAT you need to pay once using the scheme.

For help in choosing your trade sector, use the flat rate scheme VAT ready reckoner. The Ready reckoner will also help you estimate how much VAT you will pay using the flat rate scheme.

How to apply for the scheme

To apply for the scheme:

? Download form VAT 600 FRS and send it by post to the National Registration Service at the following address:

National Registration Service

Deansgate

HM Revenue and Customs

62-70 Tettenhall Road

Wolverhampton

West Midlands

WV1 4TS

? Ring the Revenue & Customs Contact Centre on Tel 0845 010 9000 and they will take your application over the phone.

? Download form VAT 600 FRS and email it to This email address is being protected from spambots. You need JavaScript enabled to view it.
 .

The flat rate scheme can be used together with the annual accounting scheme. There are also retail and cash-based versions of the flat rate scheme.

Find out more about the flat rate scheme in Notice 733 Flat Rate scheme for small businesses.

Selling to the public made easier: retail schemes

If you sell direct to the public you may find it difficult to issue a VAT invoice for each sale. There are several retail schemes available to help you with this.

The main benefits of these are that:

? they provide an alternative to standard VAT accounting rules, which might be difficult or costly for you to follow

? you will not have to issue VAT invoices unless someone asks for one.

Who can use the schemes?

If you are a retailer you can use these schemes to arrive at the value of your taxable retail sales and determine the proportions that are taxable at the different rates of VAT. Each scheme has a turnover limit.

How to apply for the schemes

You do not need to apply to use a retail scheme, but you should start to use one at the beginning of a tax period.

You will be able to obtain specialist advice from the Revenue & Customs Contact Centre on Tel 0845 010 9000 or from your accountant.

Retail schemes can be used together with the annual accounting scheme. There is also a retail version of the flat rate scheme.

Find out more about retail schemes in Notice 727 Retail schemes.

Account for VAT on the margin of second hand goods, works of art, antiques and collectors’ items

If you sell second-hand goods, works of art, antiques or collectors’ items you can account for VAT on the difference between the purchase price and the selling price, rather than the full value of the sale.

The main benefit of the scheme is that when you account for VAT you only do so on the margin, ie the difference between the purchase and selling price.

If you buy most of your stock from members of the public or from other dealers who are selling under the margin scheme, you will have no VAT to recover.

Who can use the scheme?

The scheme is optional and may be used by those who deal in second-hand goods, works of art, antiques or collectors’ items.

How do you apply to use the scheme?

You don’t need to apply to use the margin scheme.

You will be able to obtain specialist advice from the Revenue & Customs Contact Centre on Tel 0845 010 9000, or from your accountant.

The margin scheme cannot be used together with the flat rate scheme.

Find out more about margin schemes in Notice 718 Margin schemes for second-hand goods, works of art, antiques and collectors’ items.