VAT Specialist Accountants

The standard rate of Value Added Tax (VAT) in the UK is currently 20%. This rate applies to most goods and services, such as clothes, electronics, hotel stays, consultancy services etc.

However, there are some goods and services that are charged at a reduced rate of 5% VAT. These include children’s car seats, home energy supplies, mobility aids for elderly or disabled people, and some construction services like conversions and renovations. The reduced rate is intended to make these essential items more affordable.

Some goods and services are zero-rated, meaning they are charged at 0% VAT. Major categories of zero-rated supplies are:

• Most food items meant for human consumption, except hot takeaway food. This includes basic grocery items, dairy products, fruits and vegetables.
• Books, newspapers, magazines and other printed publications.
• Construction of new houses and buildings. This excludes renovations or extensions.
• Passenger transport services like buses, trains, flights, taxis, etc.
• Prescription drugs and medicines, medical equipment.
• Children’s clothing and footwear.
• Exports to countries outside the UK.

Being zero-rated allows businesses to reclaim VAT paid on associated costs while not charging any VAT on the final product.

There are also some goods and services that are exempt from VAT altogether. VAT is not charged on them, but the related input VAT cannot be reclaimed either. Common examples are insurance policies, financial services, rental of residential property, postal services, education, etc.

The zero, reduced and standard VAT rates can change with every annual budget. However, the standard rate has remained stable at 20% in recent years. HMRC publishes notices well in advance when any changes are proposed.

A business or organisation needs to register for VAT when its taxable turnover has exceeded the VAT registration threshold. As of 2022-23, the VAT registration threshold is £85,000. This means that if the total value of a business’s VAT taxable sales (excluding VAT) goes over £85,000 in a 12 month period, it must register for VAT with HMRC.

VAT registration is mandatory once the threshold is crossed, and businesses who fail to do so in time can be penalized. The VAT registration threshold tends to go up slightly every year with inflation. Some businesses can register voluntarily even if below the threshold.

When calculating taxable turnover to check the threshold, a business needs to include most goods and services they provide in the UK, unless they are specifically VAT exempt. The UK VAT rules deem a person to be carrying on a business once they make regular, repeated or significant taxable supplies, even below the registration threshold.

For new businesses, the 12 month period is measured starting when the business made its first taxable supply. For an existing business crossing the threshold, the 12 months are calculated based on the turnover immediately preceding the month of breach.

Once registered, a business remains registered for at least 12 months even if turnover falls below the threshold again. A business can apply for exemption from VAT registration if its supplies are almost all zero-rated.

A business registered for VAT in the UK must maintain comprehensive records of all its business transactions. This serves as evidence to determine the correct VAT liabilities.

In particular, the VAT account needs to be maintained. This is a summary of all output tax collected from customers and input tax paid to suppliers in the reporting period. Digitally maintained spreadsheets are usually used for this purpose.

Copies of all VAT invoices issued to customers must be kept, as well as VAT invoices received from suppliers. Invoice record keeping is also mandated to be digital. Details recorded should include invoice numbers, date, customer/supplier details, VAT amount, etc.

In addition, documents relating to business expenses like receipts, purchase orders, contracts, delivery notes, bank statements, insurance documents should be preserved.

For supplies from the EU into Northern Ireland, and from Northern Ireland into the EU, separate records need to be maintained of the corresponding transactions and VAT accounting.

All these VAT related records must normally be kept for a minimum period of 6 years. The records should be accessible and legible throughout this period. HMRC officers have the right to inspect records of up to last 4 years during compliance visits.

VAT registered businesses need to account for VAT by submitting regular VAT returns to HMRC. The standard VAT return period is 3 months, although businesses can request for monthly returns.

The VAT return summarizes the output tax and input tax for the period. Output tax is VAT collected from customers on sales. Input tax is VAT paid to suppliers on business purchases.

The VAT payable amount is calculated by deducting the input tax from output tax. If input tax exceeds output tax, the business receives a VAT refund from HMRC. Net VAT payable must be paid electronically by the due date.

Based on digital record keeping, the VAT return is usually filed directly through compatible software. The software compiles all information and computes the VAT liability. This is then submitted to HMRC via the Government Gateway after online authentication.

VAT registered businesses also need to maintain an accurate VAT account in their accounting system. It summarizes the totals of output tax and input tax for each period. This helps reconcile the VAT return figures.

Proper VAT accounting ensures taxes are paid correctly. Errors can lead to fines and penalties. VAT officers also have the power to inspect accounts and records of registered businesses.

When there is a change in VAT rates in the UK, special rules apply to determine what rate to charge based on tax points. The tax point determines when a supply takes place for VAT purposes.

If a supply takes place before the date of change in tax rate, VAT must be charged at the old rate, even if the invoice is issued later. For example, if a good was delivered on 30th March when VAT rate was 17.5%, invoice can be issued on 5th April but VAT should still be charged at 17.5% rather than new rate.

However, businesses also have the option to charge VAT at the new rate, based on the basic tax point of removal or delivery of goods, rather than invoice date. This helps if the new rate is lower.

Similarly, if a supply takes place after the rate change, VAT should be charged at new rate. But business can opt to still charge old rate if a payment was received or invoice issued earlier.

When changing VAT rates, businesses may need to issue credit notes to revise VAT charged if goods were removed before but invoiced after the change. The VAT payable adjustments will reflect in future returns.

For continuous supplies like subscriptions or rentals that span the date of change, VAT can be allocated based on old or new rate, depending on whether consideration was received before or after.

VAT registered businesses can only claim back as input tax the VAT paid on expenses used exclusively for business purposes. Any VAT incurred on purchases, assets or services used for non-business activities cannot be reclaimed.

Where something is purchased to be used for both business and personal purposes, the VAT paid on it must be apportioned. Only the business use percentage can be reclaimed. An adjustment may be required at year end based on actual usage.

For example, if a business laptop worth £1000 is purchased and 25% of its use is personal, the input VAT reclaimed would be 75% of the £200 VAT paid.

However, VAT on expenses that are wholly for personal use like Christmas gifts or employee parties cannot be reclaimed at all. Certain business assets like cars also have restrictions on claiming input VAT.

All business input VAT can only be reclaimed on submission of valid VAT invoices from registered suppliers. Private expenses should be segregated completely in the accounting records, and clearly identified as non-business.

Maintaining accurate records is crucial. VAT officers can deny part or full input tax during inspections if they find evidence of non-business use. Penalties can also be imposed for incorrect VAT accounting.

If VAT registered businesses do not comply fully with VAT rules and obligations in the UK, they can face financial penalties from HMRC. The main penalties relate to:

• Late VAT registration – Failure to register on time can attract automatic penalties based on days of delay. Fines can run into hundreds of pounds if unregistered period is significant.
• Late filing and payment of VAT returns – Delay in filing VAT returns or paying VAT beyond the deadline can lead to penalties. The amounts depend on default history over past 12 months.
• Inaccurate VAT returns – Careless or deliberate errors in reporting output or input VAT figures can lead to penalties up to 100% of VAT lost. Penalties can be mitigated by voluntarily disclosing errors.
• VAT evasion – Not paying correct VAT or fraudulent accounting of VAT to gain undue benefit can attract penalties equal to evaded tax, and even criminal prosecution.

In addition to penalties, HMRC also charges interest on late payments of VAT, errors in returns, or under declarations of VAT identified during audits. The annual rate of VAT interest is set at 3% above base rate of Bank of England.

VAT registered businesses should thus maintain accurate digital records, put proper accounting systems in place, file returns on time and avoid transactions linked to VAT fraud, to stay compliant and avoid penalties.

Intrastat returns are statistical reports that businesses registered for VAT in the UK need to submit to HMRC regarding their trade in goods with EU member states.

• UK VAT registered businesses that acquire goods from EU member states above an annual threshold of £1.5 million. This is called an Intrastat Arrivals declaration.
• UK VAT registered businesses that supply goods to EU member states above an annual threshold of £250,000. This is called an Intrastat Dispatches declaration.

If the trade in goods is below these thresholds, submitting Intrastat returns is not required.

For both Arrivals and Dispatches, the Intrastat return requires details such as:

• Commodity codes of the goods traded using the 8-digit CN codes
• Transaction values of the goods in sterling, excluding VAT
• Quantities such as net mass or supplementary units
• Partner country involved in the trade
• Nature of transaction like purchase/sale
• Transport method used

This statistical data is compiled every month and submitted to HMRC by the 10th day of the following month. Nil returns have to be submitted if there were no EU trade movements.