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An introduction to VAT

VAT has been a regular feature of our tax system since 1 April 1973.

VAT is a tax chargeable on taxable supplies made in the UK by taxable persons. Credit is given for tax paid to other businesses and the net balance is payable or reclaimable - normally on a quarterly basis.

Taxable persons

A taxable person is any person carrying on a business which is, or is required to be registered for VAT and includes the following:

  • An individual
  • A partnership
  • An unincorporated association, such as a trust or charity
  • A limited company
  • A limited liability partnership.

Supplies

VAT law covers all types of supply of goods or services (outputs), whether of a revenue or capital nature. Supplies include sale, hire, or loan of goods. Outputs normally fall into four categories:

  1. Positive-rated - taxable at applicable VAT rates
  2. Zero-rated - including socially or economically important items, e.g. exports, many food items (but not catering), books, newspapers, public transport, drugs on prescription, children's clothing
  3. Exempt supplies - including necessities such as insurance, postage, finance, education, and health
  4. Some receipts are outside the scope of VAT, e.g. donations, dividends, shares of profit compensation for losses, non UK supplies

Should I be registered for VAT?

You should notify HMRC when:

  • Taxable turnover for the past 12 months exceeds £85,000
  • There are reasonable grounds for believing that your turnover for the next 30 days will exceed £85,000

In the first case, notification must be within thirty days of the end of the relevant month. In the latter case, notification must be within thirty days of the date on which grounds first existed.

It is important to monitor turnover because there is a penalty for late registration. This is in addition to the tax payable for the period when VAT should have been charged.

Can I register for VAT if my taxable turnover does not exceed the prescribed limits?

It is possible to register voluntarily provided you have a bona fide business.

It is possible to register for VAT online

HMRC advises the time it takes to issue a VAT registration number which will, for the majority of submissions received using the online service, take three working days.

A one-off payment

Where a one-off business transaction takes place that is in excess of the VAT registration threshold that relates to an economic activity (a key phrase in EU law) the transaction requires VAT registration and accountability for VAT.

Cash accounting scheme

There is a special scheme applicable to businesses where taxable turnover is expected to be not more than £1,350,000 in the next 12 months (cash accounting).

This allows the trader to account for VAT on the basis of payments received and made rather than on tax invoices issued and received.

It may be advantageous to use cash accounting from the date of registration, although some businesses will not benefit from this scheme, particularly if they have significant business credit and supply on a cash only basis.

Retail schemes

Special schemes of accounting for VAT are available to retailers. We can advise on the best choice.

Credit for input tax

Input tax paid on purchases can be recovered by registered taxable persons, who are able to offset input tax against their output tax liabilities. Input tax is only recoverable to the extent that it relates to taxable supplies made or to be made by the business. Traders with fully exempt outputs cannot register or reclaim any input tax. Credit is available for all VAT paid on inputs where a VAT invoice is available, except for tax on private expenditure, business entertainment, motor cars, certain building materials, and goods bought under a second-hand goods scheme. Recovery of input tax may be restricted if the business makes both taxable and exempt supplies.

Evidence required for a VAT input claim

In order to support a claim for VAT input tax where a valid VAT invoice is not available, such as the supplier going out of business or not being contactable, evidence from the following list can be used: 

  • a bank statement, showing there’s actually been a supply of goods or services 
  • that supply takes place in the UK
  • it’s taxable at the standard rate or reduced rate of VAT
  • the supplier is a taxable person, that’s someone either registered for VAT in the UK, or required to be registered
  • the supply is made to the person claiming the input tax
  • the recipient is a taxable person at the time the VAT was incurred
  • the recipient intends to use the goods or services for business purposes.

You must also hold other evidence to show that the supply/transaction occurred.

HMRC’s discretion to allow a claim for input tax can only be used when there’s sufficient evidence to satisfy HMRC that a supply has taken place. 

Where it’s satisfied that the business has taken reasonable steps to comply with the legislation, and that the supply has taken place, HMRC may consider exercising its discretion. However, where a business has systematically failed to obtain a valid VAT invoice HMRC won’t consider exercising its discretion.

Where a supply has taken place, but the invoice to support this is invalid, HMRC may exercise its discretion and allow a claim for input tax. However this will depend on the evidence held to show that the supply or transaction occurred and that the supply has been made to the person claiming the input tax.

What evidence will need to be provided

Your evidence should show that a supply occurred on which VAT was charged. There’s no prescriptive list of the type of evidence required, as circumstances will vary. Evidence might include:

  • bank statements, clearly showing payment of the supply to the supplier
  • purchase orders
  • evidence of how you identified your supplier and your negotiations with them
  • contracts between you and your supplier
  • documents evidencing the transportation, storage or insurance of the goods
  • any other documents that show a supply took place between you and your supplier.

For further information please refer to VAT Notice 700.

Reclaiming overseas VAT

Where VAT input tax is incurred in other EU countries this must not be claimed on the UK VAT Return. Provided the input tax meets certain conditions it can be reclaimed through HMRC’s VAT online services system. For further information please visit the government website

How often will I have to complete a VAT return?

VAT returns must be filed online and must normally be submitted every quarter, along with any payment due to HMRC no later than 7 days after the end of the month following the period-end.

Blank returns are made available online well before the period end so there is ample time to complete and file them by the due date. Make returns and payments on time because there are penalties for late filing and/ or late payment.

It will usually be preferable to register to pay by direct debit as that allows a further three working days for payment, and it reduces the risk that payments are overlooked.

Businesses with regular repayments may make monthly returns to ease their cash flow. Those using the Annual Accounting Scheme need make only one return per year, which has to be submitted two months after the end of the scheme year. Payments of VAT under the annual accounting scheme are made monthly by direct debit.

From 2019, some VAT submissions will be made through the new HMRC online system known as Making Tax Digital (MTD). Under the new rules businesses will be required to keep digital records.

The content of these records reflects the existing requirements for VAT records, so the change in this respect is minimal.

The mandatory change will apply to all businesses which are registered for VAT and with turnover in excess of the VAT registration threshold, so the new rules only apply to businesses which are mandatorily registered for VAT.

VAT returns will be submitted via the new online portal, and submission will be 'end-to-end digital', which means that once the digital records have been created, no re-keying of data is permitted. 

For those businesses which use spreadsheets to perform VAT calculations (for example, for the second hand car margin scheme or for partially exempt businesses) the spreadsheet will suffice as digital records, but software will be needed to allow the return to be submitted under the new system. 

VAT filing

All VAT-registered businesses in the UK are required to submit their VAT returns online and also pay any VAT owed electronically.

When can, or must, I deregister?

  • You must deregister when taxable supplies are no longer made, e.g. when trading ceases
  • You can deregister when anticipated turnover for the next year (measured from any time) is less than £83,000, but this may not be in your interests - seek our advice first

Tax invoices

Specific rules are laid down as to the form and content of tax invoices. These are to ensure that all the necessary information is recorded for the determination of the rate of tax to be applied, the liability of the supplier to account for the output tax due on the supply, and the entitlement of the recipient to reclaim all or any of it as input tax.

You are required to use sequential numbering to identify the numbers you use. You can use both numbers and letters for invoice numbers, and use more than one sequence of numbers, but each must form part of a unique and consecutive series. If you cancel an invoice, you must keep a copy of it to show that you have not broken the numbering sequence.

If you supply goods that are exempt, zero rated or meet reverse charge criteria in the UK to businesses and other member states where a VAT invoice is mandatory for such goods, you will have to indicate on invoices the reason for the exemption, requirement of the customer to pay the VAT.

There is no requirement to issue a tax invoice for a zero-rated or exempt supply. However, it would seem appropriate to issue some form of invoice for either type of supply to establish that VAT is not chargeable on it.

Copies of all tax invoices issued and received must be retained for at least six years unless a shorter period (normally at least three years) is agreed with HMRC.

A tax invoice is required to show:

  • An identifying sequential number / letter (see note above)
  • The date of the supply and the date of issue of invoice
  • The name, address, and registration number of the supplier
  • The name and address of the person to whom the goods and services are supplied
  • A description that is adequate for the purposes of identifying the goods or services supplied
  • For each description the quantity of the goods or the extent or nature of the services, price, the rate of tax, and the amount payable, excluding tax
  • The total amount payable excluding tax
  • The rate of any cash discount offered
  • The total VAT payable.

Anyone supplying goods or services direct to the public or to any business that is not registered for VAT does not have to supply a tax invoice unless the customer requires one. Where the tax-inclusive value of supply is not more than £250, the supplier may issue a simplified form of invoice giving only the following details:

  • Name, address and registration number of the retailer
  • Date of supply
  • A description, adequate to identify the goods or services supplied
  • The total amount payable including tax
  • The rate of tax at the time of the supply.