VAT was originally introduced as a simple tax on purchases of goods and services in 1973. It was originally called the purchase tax but changed its name to VAT when the UK joined the EEC. VAT is now anything but simple. It is an indirect tax charged on the purchase of goods and services. Most goods and services in the UK are charged at the standard rate of VAT which is currently set at 20%.
There are 3 main VAT rates in the UK, standard, reduced and zero which are fairly easy to understand. However, there are lots of other variations that need to be accounted for correctly. Below is a list of some of the more common rates and variations.
Standard rate – 20%
Most business that are registered for VAT in the UK will charge and recover VAT at 20% of the net value.
Reduced rate – 5%
For some goods, mainly domestic fuel and power, their supply is charged at 5%. This is not usually applicable in business and you will most likely not have to use this at work.
Zero rate – 0%
These are for purchases that are from companies that are VAT registered but have goods that are supplied at zero rate. Examples of these are books (but not e-books), newspaper, milk and coffee.
These are for purchases from business that are not VAT registered. The net amount will appear on the VAT return but there is obviously no VAT to enter.
These are for purchases that are from companies that are VAT registered but some of the goods they sell are exempt from VAT. Examples of this include insurance, postage and some membership fees. If the business only sells exempt good or services, then they do not register for VAT. In this case the purchase amount is entered on to the VAT return.
Out of scope
Some goods are outside the VAT system. These can be for salary, donations to a charity or statutory charges such as congestion charges. VAT cannot be reclaimed on these purchases and these purchases are not shown in the VAT return.
If you purchase goods from another EU country who is registered for VAT in their country, then you should not be charged any VAT. You show it on your VAT return as if you had both bought and sold the item in the UK.
VAT on imports
VAT is payable on the arrival of goods into the UK at the port of entry for goods from outside the EU. This is in addition to any Customs or excise duty charged by the . Import VAT becomes input tax for the purchaser and can be reclaimed on the VAT return provided the Import VAT Certificate (C79) is provided.
A full list of goods and services which are charged at different rates can be found here: https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services#financial-services-and-investments-insurance
Another useful link is this online calculator if you need to check the VAT amount: http://www.vatcalculator.co.uk/
Need help with your tax returns? Follow this link to find out how I can help you. In the meantime, you can download a free tax dates guide for August 2017.