In the U.K. it is expected that VAT revenue will increase to £136.6 billion in 2019-20 revealing itself to be a large contributor to the country's GDP. Read our guide to see if you should register your business for VAT declarations and how to manage your paperwork correctly so that you charge the correct rates and benefit from VAT deductions.
VAT Introduced in the U.K.
Value Added Tax is a tax on goods and supplies. VAT specialists see it as an efficient tax from a raising revenue perspective with over 130 countries across the globe adopting the system. It was introduced into the E.U in 1973. In order to be a member of the EU, each country had to comply with general EU VAT laws. The current standard rate registered companies need to add to their invoices across EU countries must be at least 15% VAT.
The U.K. introduced 10% VAT on invoices and receipts in 1973 as part of its admission in the European Union. Based on EU VAT code, the UK implemented the Value Added Tax Act operated by HM Revenue and Customs (HMRC). Most member states already had a system of VAT before joining the EU but for some countries, a standard rate of VAT tax had to be introduced as an EU member state.
Between 1940 and 1973 a Purchase Tax was introduced before VAT. The name is slightly confusing because the tax was not admitted upon purchase by the end consumer but instead during manufacturing and distribution phases. It was a complicated process with a lot of different rates. This purchase tax was used to fund the military and shockingly reached a rate of 100%. Luckily with VAT, the rate no longer needed to be that high and appeared to keep be providing a large part of government revenue.
VAT Revenue in the U.K.
In 2017/18 income tax receipts in the United Kingdom amounted to 181.4 billion British pounds, which when compared with 2000/01 was a net increase of 76.2 billion pounds. In the future, income tax receipts are expected to continue to rise and amount to approximately 234 billion British pounds.
The government of the United Kingdom aims to spend approximately 256 billion on Social Protection in 2018/19, the most of any spending category. This was followed by spending on health, education and defense, at 166, 103, and 52 billion pounds respectively.
Taxes on different forms of consumer spending provide the second biggest source of revenue for government. In the latest forecast by the OBR, it is expected that VAT revenue will increase to £136.6 billion in 2019-20. That would represent 16.8 per cent of all receipts and is equivalent to around £4,800 per household and 6.2 per cent of national income.
Some countries in the EU do not require companies to register for VAT if they do not meet a certain threshold. An obligation to register for VAT with the HMRC is due when sales transactions exceed £85,000 as calculated from the beginning of a calendar year.
VAT Registered Businesses
Gov.UK provides a bank of information on VAT registration for the sale of goods and services. VAT registration is the process of listing your business with the government as active in production and sales.
In order to register for VAT you will need the following documents/information:
- National Insurance (NI) number
- Tax identifier i.e. Unique Taxpayers reference (UTR) number
- Certificate of incorporation/incorporation details
- Business bank accounts details
- Information on all associated businesses within the last two years
Once you've registered for VAT, your business is provided with a unique VAT number that you use to charge VAT, and that other businesses need to reclaim the tax they have paid. When you register, you’ll be sent a VAT registration certificate. This confirms:
- your VAT number
- when to submit your first VAT Return and payment
- your ‘effective date of registration’ - this depends on the date you went over the threshold, or is the date you asked to register if it was voluntary
VAT Input and Output Tax
Onе оf thе major benefits оf bеing a VAT registered business iѕ thаt уоu are allowed to claim back thе VAT уоu have been charged on receipts. When doing your VAT calculations, you have a balance sheet. One column is the output tax - the VAT you charge with your invoice, and the other is input tax - the VAT you deduct from the receipts of your expenses.
Seek advice from your accountant to ensure that input and output taxes are being calculated correctly as it is not always possible to deduct VAT from your all expenses. It depends on the business and the reason for your purchase. For example, VAT charged at a restaurant during a work dinner cannot be deducted; on the other hand, VAT charged for groceries that you have bought for the office can be.
Non-UK Company & VAT
If a non-UK company is importing, buying or selling goods in the UK, it may be liable to account for UK VAT. There are now only a very limited number of situations where VAT registration is required of foreign companies who are providing services in the UK. This includes following all compliance and reporting obligations - see UK import VAT deferment account.
There are three rates of VAT which are applied to goods and services. Standard Rate (currently 20%), Reduced Rate (currently 5%) and Zero Rate (0%). Items may also be exempt (or ‘outside the scope’) of VAT.
A number of goods and services are chargeable to VAT at “zero percent”. This generally means that the goods do fall within the VAT regime, but an additional VAT charge is not applied. There are a wide range of goods where zero rating applies, which includes: advertising for charities, good sold at charitable events, selling donated goods, equipment for disabled people, prescriptions, sewerage and related utility services, certain construction services, passenger transport and printing services.
VAT exempt items are outside of all VAT schemes and are not taxable. You don’t include sales of exempt goods or services in your taxable turnover for VAT purposes. If you buy exempt items, there’s no VAT to reclaim.This final set of exemptions apply to intra-EU purchases and imports from outside the European Union to ensure fairness in competitive markets.
Gov.UK goes on to describe different exemption constructions. Partly exempt business means that your business is partly exempt if your business has incurred VAT on purchases that relate to exempt supplies. This is known as exempt input tax. If you are VAT-registered and incur VAT on any items that will be used to make exempt supplies, you are classed as partly exempt.
Exempt goods and services is when there are some goods and services on which VAT is not charged, including:
- insurance, finance and credit
- Education and training
- fundraising events by charities
- subscriptions to membership organisations
- selling, leasing and letting of commercial land and buildings - this exemption can be waived
These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes. And if you buy exempt items, there is no VAT to reclaim.
In the UK, VAT returns and any payment due to HM Revenue and Customs (HMRC) can be submitted either monthly or quarterly. Usually VAT returns are completed on a quarterly basis. All VAT returns need to be submitted online unless:
- Your business is subject to an insolvency procedure – if you have a Company Voluntary Arrangement or an Individual Voluntary Arrangement you can submit your return online if you want to
- You object to using computers on religious grounds
- You can’t because of your age, a disability or because of where you live, eg you don’t have internet access
- The deadline for submitting the VAT return online and paying HMRC are usually the same – 1 calendar month and 7 days after the end of an accounting period. This normally means that the 7th day of the second month after the end of the VAT accounting period is the deadline for HMRC to receive your payment.
Through the HMRC Online Service, returns can be filed electronically. Companies with a UK VAT number must submit periodic returns detailing all taxable supplies (sales) and inputs (costs). VAT returns in the UK are due one calendar month and seven days after the end of your VAT period.
Making Tax Digital (MTD) is the government's strategic plan that transforms, modernises and makes it easier for individuals and businesses to get their tax right and keep on top of their affairs.
MTD has been around since 2010 with over 98% of businesses registered using the platform. This year, since April 2019, changes to the MTD process will impact the process significantly and for the better by linking functional compatible software. This software can create a VAT return from the digital records and which can then connect to HMRC systems via an Application Programming Interface (API).
The benefits include efficiency and an easier way for taxpayers to get their tax right. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return saving Exchequer over £9 billion a year on mistakes.
The Government further announced in March 2019 that they would focus on supporting businesses to transition, and will therefore not be mandating Making Tax Digital for any new taxes or businesses in 2020.