What is VAT?
Value Added Tax (VAT) is a sales tax levied on transactions when you purchase goods or services from a VAT registered person. Many countries, including the UK and all other countries in the EU have a VAT system.
Does everyone pay VAT?
Everyone who lives in the EU will generally pay VAT. Some visitors who live outside the EU may be able to get a refund of VAT on what they buy during their visit.
Why do we pay VAT?
Like any tax, VAT is a way in which the UK Government can collect the revenue required to pay for public services. VAT was first introduced in France in 1954. Nowadays, it applies throughout the EU although each country is entitled to set its own rates of VAT. The UK first introduced VAT in 1973.
UK VAT rates
In the UK, there are currently 3 rates of VAT.
- The standard rate of VAT
This is the rate paid on most items, with the standard rate of UK VAT currently set at 20%.
- The reduced rate of VAT
Certain items qualify for the 5% reduced rate of VAT. This rate currently applies to children's car seats, women's sanitary products, domestic fuel or power as well as products designed to help you give up smoking like nicotine patches and gum.
- The zero-rate of VAT
Certain items are zero-rated for VAT purposes. In the UK, this rate currently applies to basic food and drinks (subject to exceptions), children's clothing and books and magazines.
- VAT exemptions
In addition to the three rates of VAT mentioned above, some items are exempted from VAT. The VAT exemption applies to certain financial and insurance related transactions and also the sale or letting of residential property. An exempt item is different to a zero-rated item because a business which makes exempt sales is not entitled to deduct VAT which it has incurred in providing those supplies, whereas a business which makes zero-rated sales is.
Further information on the things that qualify for the reduced rate, zero-rate and also as exempt from VAT is available from HM Revenue & Customs (HMRC).
Are there any other VAT rules?
The VAT rate for an item can vary depending on who is selling or buying it or the circumstances it's sold in and there are many rules which determine whether VAT is due on a particular transaction. In particular, there are specific rules in relation to cross border sales and you can check HMRC's website for further details on this. In addition, special VAT rules can apply to charities and not for profit organisations.
Why do some prices include VAT but some show it without?
It's a legal requirement for prices in retail shops to include VAT. The same goes for any catalogues, websites, magazine advertisements or outlets that are aimed at the general public.
However if the audience consists of both consumers and business customers, the price may also be quoted without VAT alongside the VAT inclusive price. Both prices should be made equally clear, but you should check carefully to make sure you know how much you will be paying.
If a product or service is aimed only at businesses, the price is sometimes shown without VAT, although VAT will be charged in addition to the amount shown.
How do you know how much VAT you're paying?
You can often find the VAT amount on your receipt after you've paid for something. Some shops or businesses will break down the total cost and include a separate line for the VAT paid. You can also work this out yourself by multiplying the gross price you have paid by the VAT fraction, which is 1/6th for a standard VAT rate of 20%.
What is a VAT receipt and why would I need it?
VAT is collected by sellers of goods and services and is then paid to HMRC via the seller's VAT return. Businesses are generally entitled to deduct the VAT paid on their purchases against the VAT they've collected from their own customers, except where exempt sales are made as mentioned previously. VAT is a tax which is ultimately borne by the end consumer who is not entitled to recover VAT incurred.
If you're buying goods on behalf of your employer or your business, you may need to ask for a VAT receipt (also known as a VAT invoice). This is so that your employer or business can claim back the VAT, provided of course they are VAT-registered and the purchases have been incurred for the purpose of the business.
By law, a VAT invoice or VAT receipt must contain the following minimum information:
- A unique and sequential identifying number
- The seller's name, address and VAT registration number
- The time the transaction took place (time of supply)
- The date the invoice was issued to you
- The customer's name (or trading name) and address
- A description of the goods or services sold
- The net, VAT and gross amount for the goods or services
- The total amount of VAT charged expressed in Sterling
In the majority of cases, a VAT registered seller must give you a VAT invoice showing all of the particulars mentioned above and if you ask for a VAT receipt you will normally receive it.
Do I need to pay VAT if I buy something from another country by phone or online?
If you buy goods from outside the EU, you may have to pay UK Import VAT (as well as Customs and/or Excise duty) on top of the original price. Import VAT is not due on purchases from suppliers in other EU countries, but instead, the supplier may charge local non-UK VAT, i.e, French or German VAT. Cross border purchases can be a complex area, and you can check these rules on the HMRC website.
VAT disputes and grey areas
How an item is defined can affect the amount of VAT paid. There are some well-known examples where businesses have argued fiercely over whether VAT should apply to their products.
There is a difference in the way chocolate cakes and chocolate covered biscuits are taxed under VAT rules. Chocolate cakes are zero-rated but chocolate covered biscuits are standard rated. HMRC argued that Jaffa Cakes were biscuits, and should be standard rated, whereas McVities argued they were small cakes and therefore zero-rated. Ultimately McVities won the case and therefore VAT is not paid on Jaffa Cakes.
VAT refunds on building a home
If you are building a new home or converting a non-residential building into a home, you may be able to claim back the VAT you pay on some of the building materials, whether you do the work yourself or have it done for you.
If you are in this position you need to read the HMRC guidance carefully so that you can budget correctly.
What about quotes for servicing goods?
Where you request an estimate for work to be performed by a repairer, i.e. car service garage, it is always advisable to ask whether the quote or estimate provided is inclusive or exclusive of VAT. By asking this question will help you avoid any hidden surprises in the final amount invoiced.
I'm running my own business. Do I need to register for VAT?
If you sell items in the UK and your taxable turnover is more than £77,000 in any 12 month period you are likely to need to register for VAT. If your taxable turnover is below this threshold, you can choose to register for VAT on a voluntary basis.
As you can see VAT is a complicated tax, so you should check with HMRC who can help you understand the rules and what your VAT obligations may be. HMRC can also explain how to deal with the VAT aspects when dealing with international goods and services.
This article is for information only and should not be relied upon as providing tax advice. Advice in this area should be sought from a tax specialist.
Please be aware that the value of tax benefits will depend on individual circumstances, and tax rules may change in the future.
