UK VAT rates and VAT compliance

Suppliers of goods or services in the U.K. must register for, charge, and collect value added tax (VAT) for onward payment to the U.K. tax authority — His Majesty’s Revenue & Customs (HMRC) — through VAT filing.

Noncompliance with VAT rules and requirements could result in fines, penalties, and audits.

VAT is a consumption tax levied on all commercial activities involving the production and distribution of goods and the provision of services (it’s not a sales tax or income tax). It applies more or less to all goods and services that are bought and sold for use or consumption in the European Union (EU), as well as European nations that are not EU member states.

VAT is a consumption tax because it’s borne by the final consumer and is not a charge on businesses. It’s charged as a percentage of the price, so the tax burden is visible at each stage of production and distribution.

VAT is collected fractionally via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved. It’s paid to the revenue authorities by the seller of the goods, who is the “taxable person”, but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.

The current U.K. VAT rates are:

A number of products and services in the U.K. are VAT-exempt — usually those considered necessities or essential goods. When goods and services are exempt from VAT it means they are not subject to VAT and therefore do not incur the standard 20% VAT charge.

Exempt items are different from zero-rated supplies. In both cases, VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT — at 0%.

Exempt goods and services include insurance, education and training, fundraising events by charities, subscriptions to membership organisations, and health services.

It makes little difference to buyers if a product is tax-exempt or zero-rated, as the buyer does not pay VAT in either instance. It makes a difference for sellers, as it determines whether or not VAT incurred on the costs of providing the goods or services can be reclaimed from HMRC.

Any VAT incurred on the provider’s costs in connection with the supply of exempt goods cannot be reclaimed from HMRC.

Zero-rated goods and services are still taxable but at a rate of 0%. This means the customer does not have to pay any VAT, but because the supply is taxable, the supplier can reclaim VAT paid on the costs of making that supply. Examples of zero-rated goods and services include most food items and children’s clothing.

Businesses must register for VAT if their taxable turnover for the last 12 months exceeds the VAT threshold of £90,000, or if the business expects to exceed this threshold within the next 30 days.

Businesses must also register — even if they do not exceed the VAT threshold — if they’re based outside the U.K., or supply any goods or services to the U.K. or expect to do so within the next 30 days. If a business’s turnover is less than the VAT threshold of £90,000, they can opt for ‘voluntary registration’.

The U.K. government encourages businesses, both domestic and foreign, to register for VAT online. Businesses must pay HMRC any VAT owed from the date they register the business. Businesses that register late must back-pay VAT on any sales of goods and services that have been made since the date they should have registered.

Not registering for VAT could mean a business has to pay a financial penalty. The amount depends on how much is owed in VAT and how late the business is in registering.

The following are required for registering a limited company:

• Company registration number
• Business bank account details
• Unique Taxpayer Reference (UTR)
• Annual turnover details
• Self Assessment details
• Corporation Tax details
• Pay As You Earn (PAYE) details

The following are required to register as an individual or as a partnership:

• National Insurance number
• Identity document, such as a passport or driving licence
• Personal bank account details
• Unique Taxpayer Reference (UTR), if applicable
• Annual turnover details
• Self Assessment return
• Payslips
• P60

Once you’ve completed all necessary registration processes, you’ll receive a VAT registration certificate within one month.

Businesses must account for VAT from the date they submitted their registration application (not from the date they receive their registration certificate).

Once you’ve completed your VAT registration, your VAT number can be found on your business’s VAT registration certificate. This document will also outline when your first VAT return is due and the date from which your company went over the U.K. VAT registration threshold.

If you’re VAT registered, you can reclaim the VAT paid on purchases for business use. This is called ‘input tax’. The VAT amount that you’ve collected on the sale of your goods and services is called ‘output tax’. HMRC will deduct the input tax from the output tax — over a set period — and you must pay the difference. If you’ve paid more VAT than you’ve collected — as demonstrated in a VAT return — you can reclaim this amount

Your responsibilities as a VAT-registered business include:

• Keeping records of how much VAT you pay for things you buy for your business
• Accounting for VAT on any goods you import into the U.K.
• Including VAT in the price of all goods and services at the correct rate
• Reporting the amount of VAT you charged your customers and the amount of VAT you paid to other businesses via a VAT return to HMRC
• Paying any VAT you owe to HMRC

As a VAT-registered business, the amount of VAT you pay is typically the difference between VAT you’ve paid to other businesses and the VAT you’ve charged customers when selling goods and services.

If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.

VAT-registered businesses in the U.K. are required to keep digital records and file tax returns with compatible software. Making Tax Digital (MTD) is a U.K. government initiative to digitalise the tax system. The U.K. government’s goal is to make it easier for businesses and individuals to manage their tax obligations, and to reduce the VAT gap — the difference between the amount of VAT revenue owed and the amount of VAT collected — by requiring businesses and individuals to keep digital records and use approved, compliant software. MTD can also help reduce the amount of tax revenue lost to avoidable errors. Digital records also help to improve accuracy and lessen the need for manual processes, and can be sent directly to HMRC.

Businesses will be signed up to MTD automatically if they do not take this step themselves.

A tax point — also known as ‘time of supply’ — is the date on which tax becomes due on a particular transaction. In the U.K., the VAT on that transaction must be included in the VAT return in which that date falls and is subject to the rate of VAT in force at that time for the product or service in question.

For most goods, the tax point is the date of delivery or passage of title. For services, it’s the completion date of the service.

Certain instances can create more than one tax point for VAT in the U.K. For example, if a customer orders an item from a business and pays a deposit on the date the order is placed, this creates a tax point. If the outstanding balance of the purchase price is payable once the item has been delivered to the customer, this creates another tax point. If the supplier of the item issues a VAT invoice for the balance within 14 days after delivering it — the basic tax point — then it is the invoice that creates the tax point. If the invoice is issued after 14 days, then the tax point reverts to the basic tax point — the date the item was delivered. Because payment of the balance of the purchase price occurred after the basic tax point, it has no significance for time of supply purposes.

E-invoicing is not currently mandatory for businesses in the U.K. Mandates are being rolled out all the time across Europe (as well as other global regions) so it would be sensible for businesses operating in the U.K. to at least have an understanding of e-invoicing, as well as of compliant solutions. It’s likely a matter of when, not if, e-invoicing will be mandated for all types of transactions in the U.K. Adopting a solution can help businesses operating in the U.K. stay ahead of the curve and benefit from increased efficiency, faster payment processing, reduced errors, and improved supplier relationships.

The Peppol network (formally known as Pan-European Public Procurement Online) is being adopted by more and more countries around the world, and has become the most common delivery network and standard for trading partners (including governments) to send and exchange compliant e-invoices. The U.K. — as well as numerous countries around Europe — has adopted the Peppol framework for e-invoicing purposes.