What is VAT？

In the United Kingdom, the value added tax (VAT) was introduced in 1973, replacing Purchase Tax, and is the third-largest source of government revenue, after income tax and National Insurance.

VAT is a tax imposed on most goods and services in the United Kingdom. VAT is a consumption tax that is levied at each stage of the supply chain, from production to final sale to the consumer. Each party in the chain of supply (manufacturer, wholesaler and retailer) acts as a VAT collector.The tax, in all cases, is ultimately payable by the final consumer of the good or service. Businesses registered for VAT must charge VAT on the goods and services they supply and pay the VAT they have charged to HM Revenue & Customs (HMRC).

They collect VAT from their customer and include that VAT in their VAT return to Revenue.When returning the VAT collected, they can reclaim as appropriate, VAT which has been charged to them by their suppliers.

 

What is the VAT rate?

There are 3 rates of VAT chargeable in the UK and each rate depends on the goods or services being provided. The table below sets out these rates and what they generally apply to.

Rate	% of VAT	Applied to
Standard rate	20%	Standard VAT can apply for the part of import VAT paid at the time of return to the customs
FLAT VAT	6.5% or 7.5%	FLAT VAT cannot apply for the import VAT paid at the time of returning to the customs. The sales tax shall be paid at a uniform rate (6.5% or 7.5%).

 

 

In the UK, online sellers with estimated annual sales of less than ￡150,000 can apply for a Flat VAT rate of 6.5% in the first year and 7.5% from the second. If you declare gross sales of more than 230,000 pounds for four consecutive quarters, the tax bureau will force you to adjust it to the Standard VAT rate (20%) starting from the next quarter.

The adjustment of the two tax rate schemes can only be made once a year. If the customer is a Standard VAT, it can be adjusted back to Flat vat only after he has declared the tax rate for four consecutive quarters under the following standard VAT rate and the total sales volume is less than 150,000 pounds. Flat VAT sales VAT rate is low, but it can not deduct import VAT and other VAT invoices.

 

From April 1, 2017, Flat VAT will need to increase to 16.5% for companies that meet the following criteria:

The cost of company goods is only 2% or less of sales, or the cost of company goods is less than £1,000 / year or £250 / quarter

 

 

 

Registering for VAT

VAT applies companies, partnerships, and sole traders.Generally, you must register for VAT if you are an accountable person.An accountable person is a taxable person (for example, an individual, partnership, company) who:supplies taxable goods or services in the State and is registered or required to register for VAT.

A person carrying out only exempt activities or non taxable activities may not register for VAT. However, a person carrying on exempt activities or non taxable activities may have to register for VAT in certain situations, for example: acquiring goods from other Member States or receiving services from abroad.

If you have set up a business but have yet to supply taxable goods or services, you may reclaim VAT on your start-up costs.However, to do so you are required to register for VAT.This will enable you to obtain credit for VAT on purchases made before trading begins.

Traders whose turnover is below the VAT thresholds, farmers and sea fishers are not generally obliged to register for VAT. They may, however, elect to register for VAT. Any business with a turnover below the threshold can choose to register for VAT.       This is known as voluntary registration. Advantages of voluntarily registering for VAT include reclaiming VAT on purchases and creating a more trustworthy image for your customers.

 

What is the VAT threshold in the UK?

You must register for VAT if your taxable turnover exceeds £85,000.  Taxable turnover is all turnover generated by sales that are not VAT exempt.  Even turnover on which the VAT rate is zero is classed as taxable turnover.

 

All businesses that provide "taxable" goods and services and whose taxable turnover exceeds the threshold must register for VAT.[2] The threshold as of 2022 is £85,000,[34] by far the highest VAT registration threshold in the world.[4] Businesses may choose to register even if their turnover is less than that amount. All registered businesses must charge VAT on the full sale price of the goods or services that they provide unless exempted or outside the VAT system.

 

Companies who do not pass this threshold do not need to charge VAT on the sale of their goods or services.  They also do not need to register with HM Revenue & Customs (HMRC).

 

This turnover threshold is measured in a rolling 12-month period, rather than a fixed period like the tax year.  It could be any period of 12 whole months, for example, the start of June until the end of May.

 

What is a VAT return?

The government introduced the rules in April 2019. VAT registered businesses must report output tax and input tax to HM Revenue & Customs through a VAT return, which is usually done quarterly. Most VAT registered businesses with a turnover of more than £85,000 will also have to comply with the VAT Digital Taxation (MTD) rules.

 

What is my VAT number?

A VAT Number is a unique code that is issued to a company that is VAT registered. This is also known as VAT Registration Number. A VAT number is 9 digits long and will usually feature GB at the start. HMRC issues companies a VAT registration certificate which will show their VAT number.

 

It is very important that you check your VAT number whenever submitting VAT returns. Mistakes in your VAT return can cause delays, while HMRC may disallow your tax input claim.

 

How to calculate VAT

Calculating VAT is quite straightforward. To find VAT-inclusive prices, you can multiply the price excl. VAT by 1.2, thereby adding the standard 20% rate of VAT to the price. For the 5% reduced rate of VAT, multiply the price (excl. VAT) by 1.05.

 

To calculate VAT-exclusive prices, divide the total price (including VAT) by 1.2 for the standard (20%) rate, or by 1.05 for the reduced (5%) rate.

 

How will the new VAT penalties work?

Late submission penalties will work on a points-based system. You will receive one late submission penalty point for each VAT return that is submitted late.

Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission. ‘Nil’ VAT returns and repayment returns will also be subject to penalty points and penalties.

 

What is the VAT penalty point threshold?

The late submission penalty points threshold will vary according to your VAT return submission frequency.

Submission frequency	Penalty points threshold	Period of compliance
Annually	2	24 months
Quarterly	4	12 months
Monthly	5	6 months

 

 

Can VAT penalty points be reduced/removed?

Any VAT penalty points total can be reset to zero at any time once a customer has met the following two conditions:

1.VAT returns are submitted on or before the due date for a period based on their submission frequency (see ‘period of compliance’ in the table above).

2.All returns that were due within the preceding 24 months have been received.

3.If the points threshold is not reached, each individual point will automatically expire after 24 months.

 

 

Are there additional penalties for late VAT payments?

There are additional penalties for late VAT payments. These penalties are based on how late payment is when it is received by HMRC. The later the payment is made, the higher the penalty rate will be.

Number of days overdue	Penalty details
Up to 15 days overdue	There is no penalty if payment of VAT owed to HMRC is made in full or a payment plan is agreed on or between days 1 and 15.
Between 16-30 days overdue	A first penalty is calculated at 2% of the VAT owed at day 15 if paid in full or a payment plan agreed on or between days 16 and 30.
31+ days overdue	A first penalty is calculated at 2% on the VAT owed at day 15, plus 2% on the VAT owed at day 30.

A second penalty is calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated based on the date the outstanding balance is paid in full or a payment plan is agreed.

 

Note: HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if payment is made in full within 30 days of the payment due date.

 

VAT late payment interest charges

From 1 January 2023, HMRC will charge late payment interest from the day a payment is overdue to the day the payment is made in full.

1.Late payment interest is calculated at the Bank of England base rate plus 2.5%.

2.The repayment supplement will also be withdrawn from 1 January 2023.

3.For accounting periods starting on or after 1 January 2023, HMRC will pay repayment interest on any VAT that is owed e.g., following the submission of a repayment return.

This will be calculated from the day after the due date or the date of submission (whichever is later) until the day HMRC makes a repayment of the VAT amount due in full.

Repayment interest will be calculated at the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.