Are you confident that your products have the correct VAT threshold status? Find out more about the complex nature of VAT rated products by reading our latest blog below.
What is VAT?
VAT is a form of sales tax, which is charged on goods and services. Sales taxes or goods and services taxes are paid by end purchasers but collected on behalf of governments by retailers or service suppliers.
There are three rates of VAT which are:
- Standard rate at 20%
- Reduced rate at 5%
- Zero rate at 0%
The Jaffa Cake debate
There have been a lot of debates surrounding whether Jaffa cakes have been treated as cakes so that they are classed as a zero-rated product.
A zero rated product benefits from having no VAT added on to the product price, so consumers will benefit from cheaper products.
For example, if product A is standard-rated and product B is zero-rated, then product A will cost more to customers who cannot reclaim VAT. So, referring to it as cake over a biscuit has an advantage as biscuits are classed as standard rated.
Most consumers are not aware that they are paying sales tax as it is just included in the final price of the product.
The Pasty tax
There have been disputes over whether pasties should be classed as a luxury product due to being served warm.
A lot of bakeries have since made the decision to turn off their warmer cabinets and to make their pasties in smaller batches and sell their pasties cold, so that they could remain zero-rated to avoid having to charge their customers an extra 20% for VAT.
Some bakeries just adapted and increased their prices so that they could continue to sell pasties warm to avoid driving away customers.
What VAT status should I give my product?
There have been many products that have been questioned by VAT tribunals such as eBooks, Bombay mix, digital newspapers and breakfast muffins delivered to eat at home.
In some cases, it is easy to make a distinction, whereas in other cases it is difficult.
For example, fruit pulp is zero-rated, but fruit juice is standard rated, so the category that smoothies would fall under becomes difficult.
Make sure that you are honest when deciding upon your products VAT status.
Do not just assume that it is standard-rated as this may not be the case and you may be missing out on xero-rated status.
Avoiding the issue of VAT
You should be aware that your business is only legally required to apply for VAT once it has a taxable turnover of more than £85,000.
Most people deliberately stay just under the VAT threshold limit so that they do not have to put their prices up by 20%.
Some businesses choose not to put their prices up and cover the VAT charges from their own profits.
Simplification of VAT
The official guidance of VAT is extremely long and detailed and leaves many people confused.
VAT is not likely to change since it generates 21% of the UK’s total annual tax revenue.
Make sure that you are confident that your products have the correct VAT status, in case you are faced with any queries.
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