How VAT works
You can only charge VAT if your business is registered for VAT.
VAT is charged on things like:
- business sales – for example when you sell goods and services
- hiring or loaning goods to someone
- selling business assets
- items sold to staff – for example canteen meals
- business goods used for personal reasons
- ‘non-sales’ like bartering, part-exchange and gifts
These are known as ‘taxable supplies’. There are different rules for charities.
- must charge VAT on their goods or services
- may reclaim any VAT they’ve paid on business-related goods or services
If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.
You may want to appoint an agent to deal with HMRC on your behalf.
You must account for VAT on the full value of what you sell, even if you:
- receive goods or services instead of money (for example if you take something in part-exchange)
- haven’t charged any VAT to the customer – whatever price you charge is treated as including VAT
If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.
VAT rates for goods and services
|% of VAT||What the rate applies to|
|Standard rate||20%||Most goods and services|
|Reduced rate||5%||Some goods and services, eg children’s car seats and home energy|
|Zero rate||0%||Zero-rated goods and services, eg most food and children’s clothes|
The standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%).
Some things are exempt from VAT, such as postage stamps, financial and property transactions.
The VAT rate businesses charge depends on their goods and services.
Check the rates of VAT on different goods and services.
What you must do when charging VAT
You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases.
If a transaction is a standard, reduced or zero-rated taxable supply, you must:
- charge the right rate of VAT
- work out the VAT if a single price is shown that includes or excludes VAT
- show the VAT information on your invoice
- show the transaction in your VAT account – a summary of your VAT
- show the amount on your VAT Return
You may be able to reclaim the VAT on purchases that relate to these sales.
You can’t claim back all of the amount you’ve paid if you pay the wrong amount of VAT on a purchase.
For further information: