Total Value-Added Tax
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Table of Contents
What is VAT?
In the great majority of economic transactions, the UK government charges a VAT (Value-Added Tax) on services and goods that are sold, therefore called ‘taxable supplies’.
VAT is an indirect tax on consumption. It is the end consumer who bears the burden of VAT, and not the company producing the good or service.
The company invoices the customer for VAT and subsequently returns it to the tax department, after deduction of the VAT paid on the purchases constituting its cost price.
When the deductible VAT is higher than the VAT collected over a given period, the company can be reimbursed the difference.
Some very specific items or services are exempt from VAT.
How much is VAT?
Since 4th of January 2011, the standard and current VAT rate for most goods and services in the UK is 20% (before 17,5%).
However, you may also find two other VAT rates depending on the types of goods or services provided.
|Standard rate||20%||Most goods and services.|
|Reduced rate||5%||Some goods and services. |
Examples: mobility aids for the elderly, smoking cessation products, maternity pads, sanitary protection products, energy-saving materials, home energy, children car seats etc.
|Zero rate||0%||Zero-rated goods and services.|
Examples: physical education and sports activities, betting and gaming, antiques, charities, most food and children’s clothes etc.
Some goods and services are subject to a reduced-VAT rate to help some registered business significantly impacted by the COVID-19 crisis.
How to calculate VAT?
You will find below an example of VAT calculation.
How to take 20% off the price?
The price of an item sold £2,000 with a VAT rate of 20% is £1,666.67 excluding VAT (= £2,000 / 1.20). The item’s seller therefore owes £333.33 in VAT (= £2,000 – 1,666.67).
If this good was acquired by the seller £1,250 including VAT (meaning £1,041.67 if you remove VAT), he therefore paid £208.33 in VAT (= £1,250 – 1,041.67). The seller can then deduct this charged VAT from the one he has to pay. He will therefore only need to pay the difference of £125.00 to taxes (= £333.33 – £208.33).
The exact same calculation applies for 5% rate.
Use our free and online VAT calculator above to work out VAT for your registered business.
You must indicate the VAT rate used and final VAT amount on any of your invoice. You can edit your own invoice including VAT with our free Invoice Generator, 100% online.
How does VAT work?
Only registered business can and MUST charge VAT on goods and items. Those same registered businesses can, as explained above, reclaim any VAT amount they have paid on goods and services to the HM Revenue and Custom (HMRC) department in the UK.
Every three months, each registered business must inform the HMRC of the amount of VAT collected and paid on the full amount. This is done through the VAT return that you can fill in online on the HMRC website.
If what you paid is above what you’ve charged, then you can reclaim the difference to the HMRC. On the other hand, you must pay the rest.
You must declare the full VAT-related amount, even if you’ve exchanged goods instead of money or if you haven’t charged any VAT to a customer. As long as the good or service is not exempt from VAT, you must declare the full amount.
What is exactly a VAT return and how does it work?
You must submit a VAT return (even if your difference amount is £0) at the end of each accounting period, which is usually three months. You can do it:
- either on the HMRC online portal using your VAT number and online account
- through paper form and post if you do not want to do it online.
Your VAT return must contain:
- the full amount of your VAT-related sales and purchases during the accounting period
- the full amount of VAT you charged and you paid
- the different you need to pay or reclaim to HMRC.
You usually have 1 month and seven days from the final date of the accounting period to submit your VAT return. Deadlines are mentioned on your HMRC account. You can pay or be paid electronically by mentioning your bank details. Penalties can apply if you are late depending on your turnover and how many payment defaults you made in the past 12 months.
If at some point, your registered business is insolvent and you need to cancel your VAT registration, you must fill in a final VAT return on the HMRC website. The department will then send you a paper proof that you are no longer registered.
Which goods and services are exempt from VAT?
Some items or services are exempt from VAT (or subject to a 0% vat rate) such as:
- health services
- post services and stamps
- insurance, and some financial services
- sport activities
- betting, gaming, and ticket sales
- some cultural events
- antique goods or work of art
- some charities activities
- services or goods for disabled, handicapped or blind people
- educational services
- some freight services and aircraft maintenance
- boat mooring services etc.
The main difference between VAT-exempt good and items subject to a 0% rate is that in the first case, the government doesn’t apply tax but sellers can not claim for VAT either. For 0% VAT-rate, the government doesn’t apply tax but the registered business selling is entitled to claim VAT on the inputs.
How to use our online VAT calculator?
HelloSafe provides you with a very simple and VAT online calculator to find out the amount excluding VAT and VAT of a service or a good.
Our interactive tool allows you to fill in, for instance, the pre-tax price of the item and to add VAT choosing one of the applicable VAT rate:
You can also make the opposite calculation and fill in the price including taxes to get to know the price excluding VAT.
Our VAT calculator for the UK is an excellent alternative to tedious calculations and sources of errors in Excel.
Which goods are concerned by the reduced VAT rate due to Covid-19 crisis?
Due to the significant economic impact of the COVID-19 pandemic on some specific goods or services, the UK government has implemented a temporary reduced VAT rate of 5% from the 15th of July 2020 to support certain industries such as:
The following supplies will benefit from the temporary 5% reduced rate of VAT:
- food and non-alcoholic beverages consumed on-premises (or take-away if hot)
- hotels or holidays accomodation
- cultural events such as theatres admissions, circuses, museums, cinemas, zoos, amusement parks, fairs, concerts or exhibitions.
VAT on import and export transactions with the EU after Brexit
The Commission published on April 16, 2020, a communication outlining the main consequences of the UK Withdrawal Agreement of October 18, 2019 (Brexit) on European VAT rules and rates applicable to most goods and services transactions between European countries. The UK Withdrawal Agreement comes into December 31, 2020 for a transitional period.
For any transactions issued before or during the transitional period, the UK will still be subject to the same VAT rules as any other country of the European Community.
For any transactions issued after the transitional period, the UK will be treated as a third territory and will be subject to the standard rules and rates applicables to transactions with the EU and the other countries of the world outside the community. Registered businesses in the UK will use the VAT refund procedure to claim a VAT refund by an EU member state (13th Directive).
For Northern Ireland, the TVA rules will still be applicable for a period of 4 years after the end of the transitional withdrawal period. As a consequence, transactions between UK and Northern Ireland will be subject to VAT rules for import and export goods.
VAT applies to most goods and services known as ‘taxable supplies’. Some goods are exempt from VAT such as insurance, post, or health services. Some other goods are subject to a reduced rate of 5% such as UK fuel.
You can do it through your online HMRC portal using your VAT registration number. Mention the full amount of VAT charged and paid on the accounting period of 3 months and benefit from a reclaim if you overpaid.
In principle, yes. But it is very unlikely as VAT accounts for almost a fifth of all tax receipts.