Value Added Tax (VAT) is a tax on most goods and services provided by businesses in the UK. It is a consumption tax, meaning it is paid by the end consumer as they utilise goods or services.
Businesses are responsible for charging VAT on the goods and services they supply, and they subsequently pay this collected VAT to HM Revenue and Customs (HMRC) through their VAT return.
But what exactly do you pay VAT on, and what are some VAT exceptions to be aware of? That’s what we’ll be exploring in this blog post. Read on to learn more about VAT, the goods and services you pay VAT on, as well as VAT rates in the UK.
Do I Need to Be VAT Registered?
Whether or not you need to register for VAT depends on your taxable turnover. If your business’s VAT taxable turnover exceeds the threshold set by HMRC (£85,000), you are required to register for VAT.
However, even if your turnover is below this threshold, you can choose to register for VAT voluntarily. This can be advantageous if you want to reclaim VAT on your business expenses.
What You Need to Pay VAT On
Once you’re a VAT-registered trader, you are required to start charging VAT on sales. Here is what you need to pay VAT on:
Goods and Services
Most goods and services are charged a standard rate of VAT, which is 20%. VAT is applicable to most goods and services sold in the UK.
When you buy goods or services for your business, you should always check if VAT applies. Generally, businesses should charge VAT on sales unless the goods or services are specifically exempt or zero-rated.
Hiring Goods
If your organisation hires out or loans goods, you should charge VAT on the rental or hire charges. This is because when you hire goods, you are essentially providing a service.
This service involves granting the temporary use or possession of your goods in exchange for a fee. This means that VAT is typically applicable to the charges associated with this service.
Commission
Any commission earned by a business is subject to VAT. This includes commissions earned on sales or referrals. It doesn’t matter if you earned the commission by directly selling something or by referring someone to buy a product or service – if you’re earning a commission, you need to pay VAT on it.
Items Sold to Staff
If you sell products to your employees, you will need to pay VAT on them as you would with any other sale. For example, if you charge your staff for canteen meals, this is subject to VAT.
Business Goods Used for Personal Reasons
If you use business goods for personal reasons, you should account for VAT on the portion used for personal use. For example, if you have a business mobile phone that you also use for personal reasons, you will need to pay VAT on the portion you use outside of work.
This is known as ‘deemed supplies’ and requires you to pay VAT on the value of the goods used personally.
Selling Business Assets
When you sell assets that were used in your business, such as machinery or vehicles, you may need to pay VAT. However, special rules may apply to the sale of certain assets. If you’re unsure, we recommend seeking advice from an expert. This is something our team at LJS Accounting Services can help with.
Non-Sales/ Gifts
Finally, you are also required to pay VAT on gifts or non-sales. Even if goods or services are not sold but given away as gifts or samples, you may still need to pay VAT based on their market value.
VAT Exemptions and Exceptions
Although most goods and services are subject to VAT, there are exemptions and exceptions to be aware of. Some items are exempt from VAT altogether, such as certain financial and insurance services, medical services provided by doctors, and education and training services.
Additionally, some goods and services may be subject to a reduced rate of VAT, such as domestic fuel or children’s car seats.
There are some items that are zero-rated for VAT. This means that while they are still subject to VAT, the rate of VAT charged on them is 0%.
Examples of zero-rated items include most types of children’s clothing, most books and newspapers, and certain types of public transportation.
It’s important to note that you can’t claim back VAT on goods and services that are exempt from VAT. However, you can typically claim back VAT on goods and services that are zero-rated.
VAT Rates In The UK
In the UK, VAT rates can vary depending on the type of goods or services. The standard rate of VAT is currently at 20%. This rate applies to most goods and services.
Certain items may qualify for a reduced rate of 5% – for example, household energy and children’s car seats.
Certain goods and services, like most food items and children’s clothing, are zero-rated, meaning VAT isn’t charged. Understanding VAT rates is key to ensuring an accurate VAT return as well as compliance.
Get Help With VAT Today
Understanding the ins and outs of the VAT system can be tough, especially for small businesses. This is where we come in – our team of expert accounts at LJS Accounting Services can guide you through the world of VAT.
Our team of experienced accountants have years of experience support VAT-registered businesses, and can help ensure your business remains compliant while maximising opportunities to reclaim VAT on expenses.
From VAT registration and assessing business invoices to preparing and submitting VAT returns, we provide comprehensive VAT services tailored to your business’s needs. We can assist when it comes to paying vat, as well as when it comes to reclaiming VAT.
With our guidance, you can streamline your VAT processes and focus on growing your business without worrying about tax compliance.
If you have questions about VAT or need assistance with your VAT obligations, don’t hesitate to contact us today. Call us today on 0151 601 0000 to find out how we can help you.
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
