Value Added Tax

Rates of tax

The standard rate of VAT is 20%, or 1/6 of the consideration received for making a supply.

A lower rate of 5% (or 1/21 of the gross receipt) applies to some supplies such as domestic fuel and power, installation of energy saving materials in houses, and some conversions of residential property.

A zero rate applies to a range of supplies including most food, hard-copy books, new houses, and children’s clothes.

Certain other supplies are exempt, which means no tax is charged to the customer, but the supplier cannot recover VAT on costs. These include many land-related supplies, insurance, finance, education, health and welfare, and non-profit sports clubs.

If you supply automated digital or broadcasting services to nonbusinesses in other EU countries you must charge VAT at the rate that applies where the customer belongs. The overseas VAT must be charged on any amount of sales, even if you are not VAT-registered in the UK. You must also register for VAT in the customer’s country or register through HMRC’s VAT-MOSS system.

Thresholds

An unregistered business must register if it has made £82,000 of taxable supplies in the last 12 months, up to any month end, or if it expects to make £82,000 of taxable supplies in the next 30 days alone.

A registered business can deregister if it can satisfy HMRC that taxable supplies in the next year will not exceed £80,000.

Small businesses with taxable turnover of up to £150,000 can opt to use the ‘flat-rate scheme’ (FRS).

If using FRS, the VAT paid by the business is a fixed percentage (based on business category) of ‘FRS turnover’ rather than the net of output tax over input tax. Input tax is usually not recoverable.

Small businesses with taxable turnover of up to £1.35m can enter the cash accounting scheme (only paying VAT to HMRC when customers have paid). The annual accounting scheme (filing a single VAT return each year instead of one every three months) is also available with turnover up to £1.35m.

Scale charge for private use of fuel paid for by business

Where a business buys car fueland allows it to be used for private motoring, it has to account for output tax on the supply. There is a scale rate based on the CO2 emissions rating of the car. It will be necessary to find the exact charge on the HMRC table, which can be found on the HMRC website (www.hmrc.gov.uk).

Returns and payments

Most VAT returns are prepared for three-month periods, and must be filed electronically. Payment must also be made electronically, and both the return and payment must be received by HMRC within 7 days of the end of the month following the return period.