How VAT works
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1. Overview
VAT (Value Added Tax) is a tax added to most products and services sold by VAT-registered businesses.
Businesses have to register for VAT if their VAT taxable turnover is more than 拢90,000. They can also choose to register if their turnover is less than 拢90,000.
This guide is also available in Welsh (Cymraeg).
Your responsibilities as a VAT-registered business
As a VAT-registered business you must:
- include VAT in the price of all goods and services at the correct rate
- keep records of how much VAT you pay for things you buy for your business
- account for VAT on any goods you import into the UK鈥�
- report the amount of VAT you charged your customers and the amount of VAT you paid to other businesses by sending a VAT return to HM Revenue and Customs (HMRC) - usually every 3 months
- pay any VAT you owe to HMRC
The VAT you pay is usually the difference between any VAT you鈥檝e paid to other businesses, and the VAT you鈥檝e charged your customers.
If you鈥檝e charged more VAT than you鈥檝e paid, you must pay the difference to HMRC.
If you鈥檝e paid more VAT than you鈥檝e charged, HMRC will usually repay you the difference.
You can appoint an agent to deal with HMRC on your behalf if you prefer.
There are VAT schemes you can join that affect how you calculate and report the VAT you owe HMRC.
2. What VAT is charged on
VAT is charged on things like:
- goods and services (a service is anything other than supplying goods)
- hiring or loaning goods to someone
- selling business assets
- commission
- items sold to staff - for example canteen meals
- business goods used for personal reasons
- 鈥榥on-sales鈥� like bartering, part-exchange and gifts
These are known as 鈥榯axable supplies鈥�. There are different rules for charities.
VAT is not charged on goods or services that are exempt from VAT or are unaffected by VAT (鈥榦ut of scope鈥�).
3. How much VAT you must charge
There are 3 different rates of VAT that can be added to products. Which one applies depends on the goods and services, and how they鈥檙e used.
Most goods and services are charged at the standard rate of 20%. You should charge this rate unless the goods or services are classed as reduced or zero-rated.
Get a list of reduced or zero-rated goods and services.
Examples of zero-rated items include:
- books and newspapers
- children鈥檚 clothes and shoes
- motorcycle helmets
- most goods you export from England, Wales and Scotland (Great Britain) to a country outside the UK
- most goods you export from Northern Ireland to a country outside the EU and the UK
- goods you supply from Northern Ireland to a VAT-registered EU business - you can
4. VAT thresholds
You need to register for VAT if you go over the registration threshold (or expect to).
There are also thresholds for using some VAT accounting schemes.
Use your taxable turnover to work out if you鈥檙e over a threshold. This is the total value of everything you sell or supply that is not exempt.
Registration thresholds
| Circumstance | Threshold | What to do |
|---|---|---|
| Total taxable turnover | More than 拢90,000 | Register for VAT |
| Bringing goods into Northern Ireland from the EU (鈥榓肠辩耻颈蝉颈迟颈辞苍蝉鈥�) | More than 拢90,000 | Register for VAT |
| Selling goods from Northern Ireland to consumers in the EU (鈥榙istance selling鈥�) | Total sales across the EU over 拢8,818 | Register for VAT in EU countries |
| VAT-registered - taxable turnover | Less than 拢88,000 | Cancel VAT registration (optional) |
There are other rules on reporting VAT if you sell goods from Northern Ireland to VAT-registered businesses in the EU.
VAT accounting scheme thresholds
| Scheme | Threshold to join scheme | Threshold to leave scheme |
|---|---|---|
| Flat Rate Scheme | 拢150,000 or less | More than 拢230,000 |
| Cash Accounting Scheme | 拢1.35 million or less | More than 拢1.6 million |
| Annual Accounting Scheme | 拢1.35 million or less | More than 拢1.6 million |
There are different thresholds for other schemes like the VAT retail schemes.
Thresholds for previous tax years
Check historical information about VAT thresholds if you think you should have been registered in previous tax years.
5. VAT schemes
VAT schemes are designed to simplify the way some VAT-registered businesses calculate and account for VAT to HMRC.
They do not change the amount of VAT businesses charge for their products and services. They are voluntary to join.
VAT Flat Rate Scheme
The VAT Flat Rate Scheme lets you work out what you owe HMRC in VAT as a percentage of your gross turnover.
You can only use this scheme if you鈥檙e a small business with an annual taxable turnover of 拢150,000 or less excluding VAT.
The amount of VAT you pay depends on your industry and type of business.
Other VAT schemes
There are other VAT schemes you may be able to join depending on your VAT taxable turnover and type of business.
If your annual VAT taxable turnover is 拢1.35 million or less, you may be eligible for the:
- VAT Annual Accounting Scheme - complete one VAT return each year instead of 4
- VAT Cash Accounting Scheme - pay VAT to HMRC when your customer pays you rather than when you invoice them
If you are a retail business or sell second-hand goods, you may be able to use:
- a VAT margin scheme - pay VAT on the value you add to the goods you sell rather than on the full selling price of each item
- one of 3 VAT retail schemes - calculate the VAT once with each VAT return rather than calculating it for each sale you make