Value Added Tax (VAT) is charged on most business-to-business and business-to-consumer transactions in the UK and on goods and some services, imported from other European Union (EU) countries and from outside the EU.
VAT is charged to a buyer by a VAT-registered seller. It is reclaimed by a VAT-registered buyer after goods and services are purchased. VAT registration is required if turnover for the previous 12 months is over a specific limit – currently £67,000 – or if turnover is likely to soon exceed this limit.
There are three different rates of VAT, which apply to different types of goods and services:
- Standard rate: currently 15 percent but normally 17.5 percent. The standard rate will change back to 17.5 percent on 1 January 2010.This rate applies to all goods and services unless they are zero rated, reduced rate or exempt.
- Reduced rate: this rate of five percent is charged on items including domestic heating fuel, children’s car seats and nicotine replacement products to help people stop smoking.
- Zero rate: including books and newspapers, protective boots and helmets for industrial use, children’s clothing and footwear, and water supplies.
If you are registered for VAT, you must keep certain business records and VAT records of your sales and purchases. You must also keep a separate VAT account.
At the end of each VAT period – usually every three months – you need to fill in a VAT return. A VAT return tells HM Revenue & Customs (HMRC) how much VAT you charged to your customers, how much VAT you paid to your suppliers and the amount of VAT you must pay to or reclaim from HMRC.
VAT returns are currently available in paper and online formats, but HMRC plans to phase out paper VAT returns from 2010. From then, if your turnover is over £100,000 – or if you are newly VAT-registered – you will have to file your VAT return online and pay VAT electronically.
HMRC recommends that VAT payments are made electronically, for example, by Bacs, direct debit, Bank Giro or telephone/Internet banking. Post Office payments also count as electronic.
VAT returns must be filed and any VAT owed paid by the due date. Failure to do so can lead to a surcharge of a percentage of the unpaid VAT. The percentage of unpaid VAT charged will rise if filing or payments continue to be late.
For more information, visit www.hmrc.gov.uk/vat