An introduction to VAT

VAT is a tax chargeable on taxable supplies made in the UK by taxable persons. Credit is given for tax paid to other businesses and the net balance is payable or reclaimable - normally on a quarterly basis.

Taxable persons

A taxable person is any person carrying on a business which is, or is required to be registered for VAT and includes the following:

  • An individual
  • A partnership
  • An unincorporated association, e.g. trust or charity
  • A limited company
  • A limited liability partnership
  • Supplies

    VAT law covers all types of supply of goods or services (outputs), whether of a revenue or capital nature. Supplies include sale, hire, or loan of goods. Outputs normally fall into four categories:

    1. Positive rated - taxable at applicable VAT rates
    2. Zero rated - including socially or economically important items, e.g. exports, many food items (but not catering), books, newspapers, public transport, drugs on prescription, children's clothing
    3. Exempt supplies - including necessities such as insurance, postage, finance, education, and health
    4. Some receipts are outside the scope of VAT, e.g. donations, dividends, shares of profit compensation for losses, non UK supplies

    Should I be registered for VAT?

    You should notify HMRC when:

    • Taxable turnover for the past 12 months exceeds £85,000
    • There are reasonable grounds for believing that your turnover for the next 30 days will exceed £85,000

    In the first case, notification must be within thirty days of the end of the relevant month. In the latter case, notification must be within thirty days of the date on which grounds first existed.

    It is important to monitor turnover because there is a penalty for late registration. This is in addition to the tax payable for the period when VAT should have been charged.

    Can I register for VAT if my taxable turnover does not exceed the prescribed limits?

    It is possible to register voluntarily provided you have a bona fide business.

    It is possible to register for VAT online

    HMRC advises the time it takes to issue a VAT registration number which will, for the majority of submissions received using the online service, take three working days.

    A one-off payment

    Where a one-off business transaction takes place that is in excess of the VAT registration threshold that relates to an economic activity (a key phrase in EU law) the transaction requires VAT registration and accountability for VAT.

    Cash accounting scheme

    There is a special scheme applicable to businesses where taxable turnover is expected to be not more than £1,350,000 in the next 12 months (cash accounting).

    This allows the trader to account for VAT on the basis of payments received and made rather than on tax invoices issued and received.

    It may be advantageous to use cash accounting from the date of registration, although some businesses will not benefit from this scheme, particularly if they have significant business credit and supply on a cash only basis.

    Retail schemes

    Special schemes of accounting for VAT are available to retailers. We can advise on the best choice.

    Credit for input tax

    Input tax paid on purchases can be recovered by registered taxable persons, who are able to offset input tax against their output tax liabilities. Input tax is only recoverable to the extent that it relates to taxable supplies made or to be made by the business. Traders with fully exempt outputs cannot register or reclaim any input tax. Credit is available for all VAT paid on inputs where a VAT invoice is available, except for tax on private expenditure, business entertainment, motor cars, certain building materials, and goods bought under a second-hand goods scheme. Recovery of input tax may be restricted if the business makes both taxable and exempt supplies.

    How often will I have to complete a VAT return?

    VAT returns must be filed online and must normally be submitted every quarter, along with any payment due to HMRC no later than 7 days after the end of the month following the period end. Blank returns are made available online well before the period end so there is ample time to complete and file them by the due date. Make returns and payments on time because there are penalties for late filing and/ or late payment. It will usually be preferable to register to pay by direct debit as that allows a further three working days for payment, and it reduces the risk that payments are overlooked. Businesses with regular repayments may make monthly returns to ease their cash flow. Those using the Annual Accounting Scheme need make only one return per year, which has to be submitted two months after the end of the scheme year. Payments of VAT under the annual accounting scheme are made monthly by direct debit.

    From 2019 all VAT submissions will be made through the new HMRC online system known as Making Tax Digital. 

    We would be pleased to advise you what records you need to keep to complete the VAT return.

    VAT filing

    All VAT registered businesses in the UK are required to submit their VAT returns online and also pay any VAT owed electronically.

    When can, or must, I deregister?

    • You must deregister when taxable supplies are no longer made, e.g. when trading ceases
    • You can deregister when anticipated turnover for the next year (measured from any time) is less than £83,000, but this may not be in your interests - seek our advice first

    Tax invoices

    Specific rules are laid down as to the form and content of tax invoices. These are to ensure that all the necessary information is recorded for the determination of the rate of tax to be applied, the liability of the supplier to account for the output tax due on the supply, and the entitlement of the recipient to reclaim all or any of it as input tax.

    You are required to use sequential numbering to identify the numbers you use. You can use both numbers and letters for invoice numbers, and use more than one sequence of numbers, but each must form part of a unique and consecutive series. If you cancel an invoice, you must keep a copy of it to show that you have not broken the numbering sequence.

    If you supply goods that are exempt, zero rated or meet reverse charge criteria in the UK to businesses and other member states where a VAT invoice is mandatory for such goods, you will have to indicate on invoices the reason for the exemption, requirement of the customer to pay the VAT.

    There is no requirement to issue a tax invoice for a zero-rated or exempt supply. However, it would seem appropriate to issue some form of invoice for either type of supply to establish that VAT is not chargeable on it.

    Copies of all tax invoices issued and received must be retained for at least six years unless a shorter period (normally at least three years) is agreed with HMRC.

    A tax invoice is required to show:

    • An identifying sequential number / letter (see note above)
    • The date of the supply and the date of issue of invoice
    • The name, address, and registration number of the supplier
    • The name and address of the person to whom the goods and services are supplied
    • A description that is adequate for the purposes of identifying the goods or services supplied
    • For each description the quantity of the goods or the extent or nature of the services, price, the rate of tax, and the amount payable, excluding tax
    • The total amount payable excluding tax
    • The rate of any cash discount offered
    • The total VAT payable

    Anyone supplying goods or services direct to the public or to any business that is not registered for VAT does not have to supply a tax invoice unless the customer requires one. Where the tax-inclusive value of supply is not more than £250, the supplier may issue a simplified form of invoice giving only the following details:

    • Name, address and registration number of the retailer
    • Date of supply
    • A description, adequate to identify the goods or services supplied
    • The total amount payable including tax
    • The rate of tax at the time of the supply