Value Added Tax

VAT is charged on the value of supplies of taxable goods and services made in the UK, including some exports to EU countries. It is also chargeable on imports of goods from outside the EU.

The main rates are zero and 17.5%, with 5% on domestic fuel and energy saving materials.

Registration

All traders must register for VAT if they make taxable supplies which exceed the set limits.

Where the value of taxable supplies in the previous 12 months was more than £54,000 (£52,000 before 1 April 2001), or is likely to exceed this annual limit within the next 30 days, the trader has to register within 30 days. Failure to notify on time attracts penalties.

The VAT system

A registered trader must charge customers output VAT on any sales. There are detailed rules concerning the form and content of VAT invoices for more information. The value of input VAT can be offset against output VAT and the excess output VAT is paid over to Customs and Excise. Where there is an excess of input VAT, VAT may be reclaimed.

Some input VAT cannot be reclaimed:

• Purchases of motor cars, except cars bought wholly for business purposes after 31 July 1995.
• Business entertainment expenses.

Most businesses have to account for VAT at the date that the invoice for the supply is raised. However, traders can claim VAT bad debt relief on debts more than six months old that have been written off.

Traders with a turnover of not more than £600,000 (£350,000 before 1 April 2001) may account for VAT on a cash basis rather than an invoice basis, thereby obtaining automatic relief for any bad debts.

Exempt supplies

Certain supplies are exempt from VAT. Output VAT is not charged on such supplies and, in principle, input VAT attributable to such supplies cannot be reclaimed (or the claim is restricted).

Relatively small businesses may be able to reclaim all their input VAT - even for their exempt supplies. The input VAT attributable to their exempt supplies must not exceed £7,500 a year and must be no more than half the VAT on all their purchases.

• Exempt supplies include: insurance, finance, health, education, and burial and cremation services.
• Sales of new buildings are standard-rated unless used for residential or charitable purposes.
• In general, leases and sales of non-domestic land and buildings, other than newly built ones, are exempt, unless the option to tax has been exercised.

A taxable person may choose to charge output VAT on supplies of existing buildings and land (including rents) which are not used for residential or charitable purposes.

Zero-rated supplies

If a business makes zero-rated supplies, it does not charge VAT on supplies but can reclaim input VAT. Zero-rated supplies include:

• Most food and some drinks - but not catering, restaurant meals or hot take-away food.
• Domestic supplies of water and sewerage.
• Books and most other publications.
• Sales of new residential buildings and buildings for use by charities.
• Supplies of services by contractors when constructing new residential buildings or buildings for charities.
• Alterations to some buildings where listed building consent is needed.
• Public transport of passengers.
• Drugs, medicines and aids for the disabled.
• Clothing and footwear for children,
• Exports of goods and certain services to non-EU countries.

EU single market

Where sales are made to businesses that are registered in other EU countries, the supplier need not charge VAT.