| Liability to value added tax (VAT) VAT | | | | and buildings for use by charities. |
| is charged on the value of supplies of | | | | • Supplies of services by contractors |
| taxable goods and services made in the | | | | when constructing new residential |
| UK, including some exports to EU | | | | buildings or buildings for charities. |
| countries. It is also chargeable on | | | | • Alterations to some buildings where |
| imports of goods from outside the EU. | | | | listed building consent is needed. |
| The main rates are zero and 17.5%, but a | | | | • Public transport of passengers. |
| few supplies are charged at 5%. | | | | • Drugs, medicines and aids for the |
| Registration | | | | disabled. |
| The supply of any goods and services, | | | | • Clothing and footwear for children. |
| which are subject to VAT at any rate are | | | | • Exports of goods and certain |
| called taxable supplies whether you are | | | | services to non-EU countries. |
| VAT registered or not. All traders must | | | | Reduced rate supplies |
| register for VAT if they make taxable | | | | Some supplies are charged at a rate of |
| supplies which exceed the set limits. | | | | 5%. They include: |
| Where the value of taxable supplies in | | | | • Domestic power and fuel and certain |
| the previous 12 months was more than | | | | energy saving materials for residential |
| £61,000, or is likely to exceed this | | | | or charitable use. |
| annual limit within the next 30 days, | | | | • The grant funded installation of |
| the trader has to register within 30 | | | | heating equipment and the connection of |
| days. Failure to notify on time attracts | | | | a mains gas supply in the sole or main |
| penalties. | | | | residence of an individual aged 60 or |
| The VAT system | | | | more or in receipt of social security |
| A registered trader must charge | | | | benefits. |
| customers output VAT on any sales. The | | | | • Woman's sanitary protection |
| value of input VAT can be offset against | | | | products. |
| output VAT and the excess output VAT is | | | | • Children's car seats. |
| paid over to Customs and Excise. Where | | | | • Cycle helmets. |
| there is an excess of input VAT, tax may | | | | • Conversions of residential property |
| be reclaimed. | | | | into a different number of dwellings, |
| Some input VAT cannot be reclaimed: | | | | certain conversions into care homes or |
| • Purchases of motor cars, except cars | | | | multiple occupancy dwellings, and |
| bought wholly for business purposes. | | | | certain renovations or alterations of |
| • Business entertainment expenses. | | | | property that has not been lived in for |
| Most businesses have to account for VAT | | | | three years. |
| at the date that the invoice for the | | | | EU single market |
| supply is raised. However, traders can | | | | Where sales are made to businesses that |
| claim VAT bad debt relief on debts more | | | | are registered in other EU countries, |
| than six months old that have been | | | | the supplier need not charge VAT. |
| written off. | | | | • The customer's VAT number must be |
| Traders with a turnover of not more than | | | | shown on the sales invoice. |
| £660,000 may account for VAT on a cash | | | | • The customer is then responsible for |
| basis rather than an invoice basis, | | | | accounting for output VAT on the goods |
| thereby obtaining automatic relief for | | | | on its own VAT return, but may claim |
| any bad debts. This limit is due to be | | | | input VAT if the goods are for use in |
| increased to £1,350,000 probably from 1 | | | | making taxable supplies. |
| April 2007, subject to EC approval. | | | | • However, output VAT must be charged |
| Exempt supplies | | | | on sales to private individuals in other |
| Certain supplies are exempt from VAT. | | | | EU states. Where such sales exceed that |
| Output VAT is not charged on such | | | | state's registration threshold, the |
| supplies and, in principle, input VAT | | | | trader must register for VAT in that |
| attributable to such supplies cannot be | | | | state. |
| reclaimed (or the claim is restricted). | | | | Collection of VAT |
| Relatively small businesses may be able | | | | Registered traders normally have to |
| to reclaim all their input VAT - even | | | | submit VAT returns, and pay any VAT due, |
| for their exempt supplies. The input VAT | | | | every three months. |
| attributable to their exempt supplies | | | | • Traders who regularly reclaim VAT |
| must not exceed £7,500 a year and must | | | | from Customs and Excise may apply to |
| be no more than half the VAT on all | | | | submit monthly returns. |
| their purchases. | | | | • Some large companies have to pay |
| • Exempt supplies include: insurance, | | | | monthly. |
| finance, health, education, and burial | | | | • Tax on imports from outside the EU |
| and cremation services. | | | | has to be paid at the time of |
| • In general, leases and sales of | | | | importation, unless special arrangements |
| non-domestic land and buildings, other | | | | are set up. |
| than newly built ones, are exempt, | | | | • Traders with a turnover of |
| unless the option to tax has been | | | | £1,350,000 a year or less can complete |
| exercised. | | | | annual returns only, making nine monthly |
| • A taxable person may choose to | | | | VAT payments on account, with a final |
| charge output VAT on supplies of | | | | payment due along with the year-end |
| existing buildings and land (including | | | | return. |
| rents) that are not used for residential | | | | • Very small businesses can simplify |
| or charitable purposes. | | | | their accounting by applying to pay VAT |
| • Sales of new buildings are | | | | at a flat rate on total turnover without |
| standard-rated unless they are used for | | | | deducting input tax. The business must |
| residential or charitable purposes. | | | | have taxable turnover (including exempt |
| Zero-rated supplies | | | | supplies) up to £150,000 and total |
| If a business makes zero-rated supplies, | | | | turnover of not more than £187,500. The |
| it does not charge VAT on supplies but | | | | rate is determined by trade sector. |
| can reclaim input VAT. | | | | • Penalties are charged for late or |
| Zero-rated supplies include : | | | | incorrect VAT returns. |
| • Most food and some drinks - but not | | | | • A default surcharge of between 2% |
| catering, restaurant meals or hot | | | | and 15% of the VAT payable is charged |
| take-away food. | | | | where returns are late. |
| • Domestic supplies of water and | | | | • A penalty of 15% is charged for |
| sewerage. | | | | serious or persistent misdeclarations. |
| • Books and most other publications. | | | | • Interest can also be charged on VAT |
| • Sales of new residential buildings | | | | paid late. |