How much do you know about VAT?

What is VAT?

Value Added Tax is a government tax on goods and services, and it's based on the increase in value of a product or service at each stage of production and distribution.

It was initially brought in during Edward Heath's prime ministership in 1973, as part of the UK's condition of joining what was then the European Economic Community, and it started off as a simple 10% tax on nearly all goods bought from a business. It replaced the Purchase Tax, which was a complicated system with numerous different rates within it, and is administered by HMRC. VAT is the third largest source of government revenue after income tax and National Insurance, and it generated £125.3 billion in 2017/2018.

Do I need to register for VAT?

All businesses that provide taxable goods and services must register for VAT if their turnover is more than £85,000, although if they have a lower turnover they can still register.

Registered businesses must pay HMRC the VAT they have charged, but they may offset this with the VAT they have incurred on goods or services they have purchased.

How much do you know about VAT? - colleagues at computer screen

HMRC's Flat Rate Scheme allows a VAT registered business with a turnover of less than £150,000 per annum to pay a fixed percentage of its turnover to HMRC every three months. The scheme is intended to help small businesses by reducing the paperwork and allowing new companies to keep some of the VAT they charge their customers.

The standard rate of VAT in the UK is currently 20%, but contrary to popular belief there are also reduced rates which are charged at 5%. Other items are zero-rated and some are completely exempt. It's a complicated system – take a look:

VAT rates for different goods and services

1. The following items are among those charged at the standard rate:

  • Alcoholic drinks
  • Biscuits – but only if they're covered in chocolate
  • Hot takeaway food such as burgers
  • Prams and pushchairs
  • Taxi fares
  • Fruit juice and other cold drinks (but excluding milk)
  • Delivery charges
  • Cereal bars

2. The following items are among those charged at the 5% reduced rate:

  • Children's car seats
  • Energy saving materials, but only if permanently installed in residential or charity premises
  • Sanitary protection
  • Smoking cessation products
  • Mobility aids for the elderly
  • Electricity, gas, heating oil and solid fuel (domestic/residential/charity/non-business applications)

3. These items are zero-rated:

  • Chartering an aircraft
  • Biscuits (but only if they're not covered with chocolate)
  • Bread
  • Construction and sale of new domestic buildings
  • Protective boots and helmets
  • Sandwiches (but only if they're cold)
  • Public transport fares

4. These items are among those which are exempt:

  • Cultural events
  • Selling, leasing and letting commercial land and buildings
  • Health services
  • Postage stamps
  • Financial services such as money transactions, loans/credits, savings/deposits, shares/bonds
  • Insurance

If you run a small business, VAT compliance can seem like a daunting task. Here at AMR Bookkeeping Solutions we can help keep track of your payments, expenses, receipts, income and outgoings, give reliable financial advice and guidance and help with online submission of VAT returns. We ensure your books are in the best possible order to be passed over to your accountant for the presentation of your annual accounts. Why not get in touch and let us help with your VAT issues.

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