Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.
Running your own business inevitably changes your perspective on value-added tax (VAT). As well as impacting company accounting and cash flow, registering for VAT has a wealth of compliance factors to be aware of.
In the wake of Brexit, legislation around VAT is constantly changing. In this VAT guide, we look at everything businesses need to know about VAT registration and compliance in this ever-shifting legislative landscape.
What is VAT?
VAT is a form of consumption tax – a tax applied to purchases of goods or services and other ‘taxable supplies’. For a business, VAT plays an important role and can be charged on a range of your goods and services. Charities will have different rules governing their VAT. But for many businesses, areas that are taxable include:
sales of your goods and/or services
the hire or loan of your goods
staff sales, e.g. staff meals
business goods you use personally
the sale of business assets
VAT is a tax which is ultimately paid by the consumer, and is not a tax on individual businesses. VAT is typically included on business invoices. POS systems can also be programmed to add VAT to product prices and aggregate VAT.
While businesses pay VAT to Her Majesty’s Revenue and Customs (HMRC), the actual cost has already been paid by the customer, covered by the purchase price of goods or services bought. As such, it is an indirect tax, but businesses are still required to report it to HMRC.
What is the VAT Threshold? Do I Need to Register my Business?
If your business turnover is more than £85,000, this is the threshold at which you are legally required to register for VAT. This will require you to charge VAT on all services or goods offered by your business. Note that you can only charge VAT if you are registered to do so. Businesses must register for VAT whether they are incorporated or are sole traders, whether they pay corporation tax or not.
Businesses with revenue below this threshold may also benefit from registering for VAT. VAT registration allows businesses to reclaim VAT on goods and services purchased by your business. It can also make your small businesses appear more established.
What is My VAT Number?
Company VAT numbers are given only to VAT-registered businesses and can be found on your business’ VAT registration certificate. This important piece of paperwork will also outline when your first VAT return is due and the date from which your company went over the UK VAT registration threshold and therefore became required to register.
What are My VAT Responsibilities?
As a VAT-registered company, you must charge VAT on your goods or services, and can also reclaim VAT on those you have purchased for business-related purposes. Businesses are also legally required to provide a VAT invoice which includes sales tax whenever a sale is made. The only exception to this is in-person sales where a receipt of goods is adequate. However, businesses must still provide a VAT receipt to any customer that asks for one.
VAT charged by your business is calculated on the full value of what it is you sell. VAT must be applied to sales even if you operate based on an exchange or part-exchange basis. If you charge a customer without the inclusion of VAT, the sales price you do charge will still be considered inclusive of VAT by HMRC.
VAT-registered businesses must report the amount of VAT they have charged or paid to HRMC via a VAT return usually completed once every 3 months. You must complete this even if you have no VAT to report.
Over-charges of VAT by you to the customer must be paid to HMRC. If you have paid more VAT than you have charged your customers then this difference can be reclaimed from HMRC.
What is the Current Rate of VAT?
In 2023, the VAT rates for goods and services remain unchanged. Rates are as follows:
|Rate||% of VAT||Applicable to|
|Standard||20||The majority of goods and services|
|Reduced||5||Select goods and services including domestic energy bills, residential property conversions and children’s car seats|
|Zero||0||Zero-rated goods and services e.g. children’s clothing|
What is Exempt from VAT?
The rate of VAT depends on the nature of the good or service being purchased. Some services and goods are in fact VAT-exempt. These are typically items that are considered essential for day-to-day living. These include:
education or training
sporting activities and physical education
selling or letting commercial properties
insurance and finance services
and postage stamps
You can see precisely which level of VAT relates to which type of service or product on the gov.uk website.
What is the Difference Between ‘Zero-Rate’ and ‘VAT-Exempt’?
Zero-rated supplies are not charged VAT in a traditional sense but at the rate of 0%, allowing businesses which supply these items or services to recover the VAT on their business overheads and costs. VAT-exempt supplies are not eligible for VAT reclaims.
Some examples of zero-rated products include:
basic unprocessed or raw foods
books and newspapers
and period products (as of 2021)
The key difference between zero-VAT and VAT-exempt products is that zero-rated products are still considered part of a company’s taxable revenue on the company’s tax return, while VAT-exempt products are not.
If your business offers only VAT-exempt supplies then you are not required to register for VAT.
What Can I Reclaim VAT On?
Businesses can reclaim VAT on goods or services used specifically for their operation. Claiming VAT back is possible for things such as
Mobile service plans used for business calls
Vehicles used only for business
Fuel, accessories and maintenance for said vehicles
Utility bills if you are a home business (proportional to the percentage of utilities used for business needs)
Some things are not eligible for VAT reclaims, these include:
Anything that is purely for private use
Business assets transferred to you as a going concern
More information on VAT reclaims can be found on the gov.uk website.
Changes to VAT After Brexit
The domestic VAT rules affecting your business should stay the same following the UK’s departure from the European Union in 2021. Things are now a little more complex if you regularly import and export goods to or from the continent. Below are the key changes to VAT following Brexit.
New rules around EU import VAT
The UK left the EU’s VAT regime at the beginning of 2021. This means countries within the EU are now treated the same as those outside the EU when it comes to value-added tax. In other words, any goods coming in from the EU and elsewhere must now account for import VAT if they’re valued above £135.
Goods become subject to import VAT when they enter free circulation – for example when they’re going through a UK port. Your business can choose to pay the import VAT at this stage and later reclaim it from HMRC using C79 certificates.
Alternatively, you can now take advantage of a ‘postponed accounting’ system for VAT, introduced by the Government in January 2021. In a nutshell, it gives you the chance to account for any import VAT using your VAT return instead. It means you don’t have to pay the tax as soon as your goods arrive in the UK and then reclaim them.
If your company imports EU goods with a value under £135, you should declare the value-added tax on your next VAT return using the reverse charge procedure.
Reforms to EU export VAT
If your business sends goods across the Channel, you’ll need to know the EU export VAT rules, which came into force in January 2021.
Since EU countries are now treated the same as those outside the EU, your exports to Europe will be zero-rated for UK VAT – with a 0% rate applying. It means you won’t pay UK value-added tax on your goods, although they’ll still need to be included in your VAT accounting.
It’s important to note that if you’re sending goods directly to consumers on the continent, you’ll need to research whether EU VAT registration is required in the countries you serve.
Why Northern Ireland’s trade rules are different
The Brexit deal agreed upon between Britain and the EU handed a special trade status to Northern Ireland. The aim was to avoid a hard customs border on the island of Ireland. This might be something to factor into your VAT planning, with more information available from the official government website.
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New changes to VAT in 2023
In the ever-changing landscape of post-Brexit tax legislation, 2023 brings several new changes to the UK’s VAT laws.
Changes to VAT in 2023 include:
Point-based penalty system
VAT periods that begin after 1 January 2023 will be subject to a new penalty regime, replacing the previous default surcharge regime applied to late VAT returns and payments. The new scheme will use a points-based system whereby points are issued for late filing, with a £200 fixed penalty changed when companies accrue 4 points.
Penalties for late payments will be calculated at 2% of outstanding VAT when payments are over 15 days outstanding, with a daily rate of 4% applicable to payments that have been outstanding for more than 30 days.
However, to help businesses adjust to this new system, HMRC has stated that businesses will not be charged the 15–30-day penalty for late payments throughout 2023 unless payments are more than 30 days late.
Interest on late payments
Interest will now be charged on late payments from the day the payment is overdue to the day the outstanding balance is paid in full. This is calculated at the Bank of England base rate plus 2.5%.
Changes to option to tax processes
From 1st February 2023, new changes were implemented to the VAT option to tax processes. Therefore, from this date, HMRC has stopped issuing option-to-tax (OTT) notification letters in response to submissions. HMRC has also stopped processing requests to confirm the existence of an OTT. There are some limited circumstances where this will not apply, most notably if the effective date of the option is from more than 6 years ago.
These changes are designed to make businesses more accountable for providing accurate information regarding their OTT position.
VAT-related payment scheme for used car sales to Northern Ireland and the EU
HMRC has also revised its guidance for automotive businesses with regard to the second-hand margin scheme for vehicles purchased in Great Britain and sold to Northern Ireland and the EU.
As of 1 May 2023, a new second-hand motor vehicle payment scheme will apply.
VAT will be charged on the full selling price, but businesses will be able to claim a VAT-related payment if they:
are established and VAT-registered in the UK
buy an eligible second-hand vehicle in Great Britain
transport said vehicle with the intention to sell in Northern Ireland or the EU
Retained EU laws to end in December
Finally, VAT legislation and other EU-derived laws will be repealed under the current wording of the Retained EU Law (Revocation and Reform) Bill. This will apply to all laws unless ministers decide to retain specific pieces of legislation.
This may lead to further changes to VAT laws in 2024 and beyond. We will update our VAT guide with everything UK businesses need to know about any future changes.
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