VAT landscape in UK – things to know

Value Added Tax (VAT) is a tax imposed by the UK government on the value added to goods and services during production and distribution. In this blog, we will discuss the main VAT rules in the UK.

VAT Registration

A business must register for VAT if its taxable supplies and importations exceed the registration threshold, which is £85,000 for the year ending 31 March 2022. A business may choose to register for VAT voluntarily if its taxable supplies are below the registration threshold. Once registered, a business must charge VAT on its taxable supplies and reclaim any VAT incurred on its purchases.

VAT Rates

There are three standard VAT rates in the UK: 20%, 5%, and 0%. The 20% rate is the standard rate applied to most goods and services. The 5% rate is applied to essential items such as domestic fuel and power and certain types of food, and the 0% rate is applied to exports and certain types of supplies such as books and newspapers.

VAT Returns

VAT-registered businesses must submit VAT returns to HM Revenue & Customs (HMRC) periodically to declare the VAT due or repayable for a specified period. The frequency of VAT returns depends on the method of accounting used by the business. The most common methods are cash accounting, invoice accounting, and flat rate scheme.

Cash Accounting

Under the cash accounting scheme, VAT is accounted for when it is received from customers and paid to suppliers. This method is suitable for businesses with a low level of VATable sales and purchases.

Invoice Accounting

Under the invoice accounting scheme, VAT is accounted for when an invoice is raised or received, regardless of when payment is made or received. This method is suitable for businesses with a high level of VATable sales and purchases.

Flat Rate Scheme

Under the flat rate scheme, a business charges VAT at the standard rate on its sales and pays a flat rate percentage of its taxable turnover to HMRC, regardless of the VAT incurred on its purchases. This scheme is intended to simplify VAT administration for small businesses and is only available to businesses with a turnover below £150,000 per annum.

VAT on Imports

A business must account for VAT on imports of goods into the UK. The VAT is calculated as the value of the goods plus any transport and insurance costs, and is payable at the point of importation.

VAT on Exports

A business is not required to charge VAT on exports of goods and services outside the UK, but may claim back any VAT incurred on purchases related to its exports.

VAT on Distance Sales

A business based in the UK must charge VAT on distance sales of goods to customers in other EU countries if its sales exceed the distance sales threshold, which is £70,000 for the year ending 31 March 2022. A business based outside the UK must register for VAT in the UK if its distance sales to customers in the UK exceed the UK distance sales threshold, which is £85,000 for the year ending 31 March 2022.

VAT Recovery

A VAT-registered business may reclaim VAT incurred on its purchases and expenses, except for any input VAT incurred on disallowed expenses such as entertainment, fines, and director’s loans. Input VAT must be claimed within four years from the end of the VAT quarter in which the VAT was incurred.

VAT Penalties

A business that fails to comply with VAT rules and regulations may be subject to penalties and interest charges. Penalties may include fines, surcharges, and, in severe cases, criminal prosecution. Interest may be charged on late or incorrect VAT payments and returns.

Conclusion

To conclude, VAT can be a complex area of tax legislation if you are dealing with this for the first time. Contact one of our accountants who will be able to help you navigate the compliance.