What is VAT?

VAT, or Value Added Tax, is an indirect tax on consumption- paid by consumers when buying goods and services.

Since January 2011, most goods and services in the UK have been subject to a standard VAT rate, i.e. 20%. 

Businesses must apply for VAT registration only if annual taxable turnover exceeds the VAT threshold in the previous 12 months or the next 30 days. Currently, the VAT threshold is £85,000.

How much is VAT in the UK? (VAT rates)
  • The standard rate of VAT is 20%, 
  • The reduced rate is 5%, for (health or energy-related goods) and 
  • There is a 0% (Zero) rate for some exceptional products such as children’s clothing and boots.
  • Some goods are exempted from VAT.

VAT Return
  • A VAT Return shows how much VAT you owe HMRC (or how much they owe you). Most businesses submit quarterly, whereas large firms do it every month.
  • VAT return’s calculation is a process of deducting the VAT you pay to the suppliers from the VAT you collected from your customers. The difference is your VAT liability.

VAT liability = VAT collected from customers – VAT paid to suppliers

  • In case you paid excess of VAT, you will be due a refund from the HMRC. 
  • Most businesses file VAT returns every quarter.  The deadline for filing a VAT return is one calendar month and seven days after VAT quarter-end.

What is the differentiation between zero-rated and VAT-exempt?
  • Zero-rated and VAT-exempt are not the same. When an item is zero-rated, it is still VAT taxable at 0%. Even if you charge 0%, you must still keep track of the sale and document it on your VAT return.
  • Sales of zero-rated products count against your £85,000 12-month threshold.
  • Exempt supplies aren’t required to be recorded on your VAT return, and they don’t count against your VAT threshold.

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