VAT is a tax paid on the sale of goods and services. It stands for “Value-Added Tax”. The final consumer of a product or service pays VAT to a business, and this tax is then paid back to the Government.
In this article, we will discuss everything that you need to know about Value-Added Tax, from both an individual and company standpoint.
The History of VAT
VAT was introduced in the UK in 1973, replacing what was then known as Purchase Tax. The main difference between the two is that Purchase Tax was applied to the wholesale price, whereas VAT is charged at the stage where the sale is completed.
The VAT rate has varied significantly ever since its inception, increasing and decreasing every few years. It started at 10% (of the value of the sale), dropping as low as 8% between 1974 and 1979. Since 2011, the VAT rate has stayed at its highest ever percentage of 20%.
Different VAT Rates
While the majority of goods and services are taxed at 20%, there are a few exceptions.
The reduced rate is charged for a select few products. For example, domestic fuel and power only has 5% VAT added on, and the same percentage is charged for the sale of children’s car seats and some home mobility aids, to name but a few.
Sometimes you don’t have to pay any VAT whatsoever. This is known as a zero rate and applies to the following goods and services:
- Books/Newspapers
- Children’s apparel
- Certain animal feeding products
However, businesses must make sure to record zero rate sales on their VAT accounts, even though HMRC will not take any money away from these sales.
Finally, some products are completely exempt from VAT. These include insurance and postage stamps for example. Unlike with zero rate VAT, these do not need to be included in VAT returns.
Who Pays VAT?
VAT has to be paid by all consumers on the vast majority of products and services that they purchase.
On the other hand, not all businesses have to pay back the money earned through VAT to the UK government. You only need to do so once your business has a turnover in excess of the £85,000 threshold. However, you can also get money back from HMRC on some goods you buy by having the VAT deducted in your quarterly VAT return (every three months).
How To Pay VAT
Her Majesty’s Revenue and Customs (HMRC) allows a wide variety of ways of paying VAT.
Until the Making Tax Digital (MTD) scheme is rolled out to cover VAT repayments as well, here are some of the ways in which VAT returns can be paid:
- Faster Payments (up to £250,000) and CHAPS (Clearing House Automated Payments System) are the fastest methods of paying your business’ VAT bill. HMRC will receive the payment within a single working day
- Other methods done directly with the bank (direct debit, single credit/debit card payment, standing order) take longer at up to 3 working days before the transaction is completed
Bear in mind how long it takes for the transaction to go through, as HMRC must receive the payment before the deadlines.
How To Charge VAT
You must make sure to include the correct information pertaining to VAT whenever you make a sale to a customer or client. This will make the process of filing VAT returns a lot quicker and easier.
The invoice that you send to the customer must contain the following:
- Invoice number and date
- Information of your business (including your VAT registration number)
- Customer information
- Description of the product/service sold
Each transaction should state the value of the sale both including and excluding VAT, as well as the quantity of items sold and VAT rate for the item.