You must register for VAT with HMRC if your business’ turnover is more than £85,000 or if you expect your turnover to go over this amount in a single 30 day period.
Once you become a VAT registered company, you must complete a VAT return, usually every 3 months to HMRC, which includes the VAT you have charged on sales less the VAT you are reclaiming on purchases bought in for the business.
The VAT you charge to customers is known as output VAT. Watch our video to learn more about this.
Output VAT is charged on number of things, known as taxable supplies including:
- Sales – the goods and services you provide to customers
- The sale of any business assets
- Commission
- The hiring or loaning of goods to someone
- Items sold to staff such as lunches
- Business goods used for personal reasons
- ‘non sales’ such as free samples, part exchanges or barter transactions
What rate is VAT charged at?
The rate of VAT charged depends on the type of goods or services sold. There are three rates of VAT. These are:
- The standard rate of VAT of 20%, which applies to most goods and services sold
- The reduced rate of 5%
- The Zero rate.
- Some items are also exempt from VAT or outside the scope of the UK VAT system.
Standard rate VAT
Standard rate VAT applies to most goods and services sold. You should charge this rate unless the good or service provided falls under the reduced rate or zero rate. If in doubt use 20%. In addition, standard rate VAT supplies include:
- The sale of land and buildings
- The sale of accommodation if you’re in the hospitality services
- Household consumables
- Adults clothing
- Legal and professional services provided if you are a consultant
- Even though most food and drink for human consumption is zero rated, some items fall into the standard VAT rate. These include:
- Catering
- Alcohol
- Chocolate bars and crisps
- Hot food
- Ice cream
- Soft drinks and mineral water
- Restaurants must also charge VAT on food eaten on their premises including communal areas for example in a food court.
Reduced Rate VAT
The reduced rate of 5% applies to items including:
- Mobility aids for the elderly
- Electricity and gas for domestic use
- Maternity pads
- Ladies’ sanitary products
- Energy saving materials
Zero Rate VAT
Zero rated items include:
- Children’s clothes
- The selling of donated goods in a charity shop
- Equipment for disabled people
- Dispensing of prescriptions,
- Most food and drink, public transport
- Publications including books, magazines, newspapers
Exemption from VAT
Some products are exempt from VAT. This means no VAT needs to be applied when selling these goods even if you are VAT registered. These include:
- Sports activities
- Gambling
- Antiques
- Funeral plans
- Education
- Insurance
Outside the scope of VAT
Finally, some services are outside the scope of VAT including welfare services provided by charities.
Please see www.gov.uk for more information on VAT-able supplies.
What if I haven’t received my VAT number yet?
If you’re new to VAT and you are still awaiting your VAT number you can’t charge or show VAT on your invoices until you receive your number. However, you should increase your prices to account for the VAT and still pay the VAT amount to HMRC, until you receive your VAT number.
Explain to your customer you’re awaiting your VAT number and when this comes reissue them a new invoice.
You can simply work out the GROSS amount including VAT by multiplying the NET amount by 1.2 if the sale is standard rate or 1.05 if the sale is a reduced rate.
I hope you found this video useful. If you are VAT registered or considering voluntary VAT registration, we would recommend speaking to your accountant or HMRC first as sometimes it is difficult to distinguish which items have VAT on. If you want to find out more about VAT, check out our other videos or get in touch using the details below.