Whether you are a sole trader, a small business or a limited company, the choice to become a VAT registered business is going to be a key decision.
VAT codes are guides for businesses about what tax they should be paying on particular products and services. While many of these taxable supplies are charged at the full rate of 20%, some are exempt items or have a reduced rate.
Understanding how to charge VAT and how tax exemptions work is important for small and medium-sized businesses, particularly if they want to reclaim VAT on purchases they have themselves made.
What is VAT?
VAT stands for value added tax and your business will pay VAT on certain purchases, everything from taxi rides and flights to stationery and office equipment such as computers and printers. You will also need to charge VAT to your customers on products and services you provide if your total VAT taxable turnover is in excess of £85,000 a year.
If you decide not to register for VAT because you are below the tax threshold it means you can not claim it back for goods or services that you may have received from third party suppliers.
How do I become a VAT registered business?
Business and sole traders can register for VAT online and it takes just a few minutes through the HMRC portal.
You can register for VAT if your turnover is less than £85,000 and this has advantages if you pay more for business purchases from third parties (input tax) than you charge VAT to customers (output tax). Some small businesses also register for VAT to appear slightly bigger than they actually are.
Once you have signed up to submit VAT returns, HMRC will send a certificate to confirm you are now VAT registered which includes:
- The VAT number for your business.
- When you will need to make your first VAT return and payment.
- The date of your registration.
It’s important to note that, until you have received your VAT registration details, you cannot add them to your VAT invoice, even if you have gone over the threshold. Once you have your certificate, then you can begin including it, submit returns and pay VAT.
How much you pay HMRC (and how much you can claim back) will depend on the type of goods and services you provide and the level of your turnover.
Note: In some cases, you cannot register for VAT returns online but need to submit a paper form. You can find details here on the HMRC website.
What are the zero rated VAT items in the UK?
The VAT rate you pay will depend on the type of product or service that you provide through your business. VAT in the UK ranges from the zero rate to 20%. These can, however, vary from time to time depending on circumstances.
For example, during the pandemic, VAT rates were reduced for the hospitality and holiday sectors to help them through the crisis.
Several items are classed as zero rate in the UK and it’s important for VAT registered businesses to understand these. They include (subject to some conditions within each category):
- Goods exported outside the UK.
- Various sport, culture and leisure activities.
- Goods and services relating to education, health services, charities and welfare.
- Some goods or services relating to the provision of energy, utilities and energy savings.
- Goods and services relating to some construction and building services or concerned with land and property.
- Services relating to printing, postage and publications.
Other goods and services come with a reduced VAT rate, usually around 5% which is introduced for a variety of reasons. You can find a full list of zero rate VAT products and services on the Government website.
Finally, some goods and services are VAT exempt which is slightly different than zero rate VAT.
Most businesses don’t want to pay or charge more VAT than they need to and so it’s important to understand what is VAT exempt and how this affects what you pay.
If you only sell items that are VAT exempt, then you cannot register and you cannot claim back any VAT that you are charged in the normal running of your business.
VAT exempt is different from supplying zero rated goods or services in your business which does allow you to register and claim back. In truth, most businesses won’t be fully VAT exempt but it’s still important to know where you stand and what this means for your operation.
Areas where goods and services are VAT exempt include finance and credit, charity fundraising and education and training.
Which VAT codes in UK do I need to know?
VAT codes are relatively simple but it’s worth making sure you understand what they mean:
- 20% S: This is the standard rate of VAT in the UK and applies to all goods and services unless they fall under another category.
- Exempt goods: These are items that are 100% exempt from VAT and include, for example, certain kinds of education and training and some health services.
- 5% R: This is a reduced rate of VAT which is applied to certain goods and services or sectors, including mobility aids and children’s car seats.
- 0% Z: Items have a 0% VAT and it applies to specific goods or services such as motorcycle helmets and baby wear.
Some items are termed as ‘outside the scope of VAT’ and not exempt goods. These are not reported on the VAT submission. They include things like toll charges on bridges and low cost welfare services.
Frequently Asked Questions on VAT
What does VAT inclusive mean?
When you charge VAT, you have the choice of using the VAT inclusive approach or the VAT exclusive. Most businesses include the cost of VAT in their products or services. For example, if you had a product worth £100 you would add 20% VAT to make it £120 when selling to the customer.
What is a first VAT return?
Once you have been given your VAT registration certificate, you will also be informed when the date of your first VAT return is likely to be. For most businesses, this is usually completed every three months. You need to submit your first VAT return by the due date, even if you have no expected VAT payments or refunds.
It’s important to keep accurate VAT records for HM Revenue and ensure that you have a full accounting of VAT charged, whether you’re a small business or large corporation. You should also ensure that details such as your VAT registration number are kept in a secure location in case you need to access them.
Are insurances exempt from VAT?
Insurance premiums and products like insurance postage stamps that protect deliveries are not subject to VAT and are classed as VAT exempt goods.
Whether you need to charge VAT or claim it back, it’s important to have an understanding of VAT exemption when it comes to goods or services and what this means for your business. Exempt goods can vary depending on circumstances and the state of the economy so it’s also critical to keep an eye on any changes that may be just around the corner.