Keeping track of taxes in the UK isn’t exactly a piece of cake. There are so many types of taxes that it’s difficult to know which ones apply to you and/or your business. If you don’t file your taxes correctly with the HMRC, it could result in penalties, which could cost you dearly. This article gives you an introduction to the main types of taxes in England, Scotland, Wales, and Northern Ireland...
VAT is a tax charged on goods and services in the European Union, including the UK. If a product or service has VAT charged to it, it should be included on the price advertised. It was introduced in the UK in 1973, and is an important source of income for the government, collected by HMRC. The level of VAT can change, and was increased to 20% in 2011 – and has remained at 20% ever since.
VAT is considered to be an indirect tax, because individual consumers do not have to pay VAT in their tax declarations, but rather it is collected by the business selling the goods or services, and paid to HMRC via the business. In this article we will look at further details of what VAT is, who needs to charge it, and how to calculate it.
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VAT – an important source of income for the government
VAT is one of the most important taxes for the government – after income tax and national insurance, it is the largest source of revenue for the government. It is estimated that the UK lost £1.5bn in 2017 alone, just through overseas online retailers not paying VAT in the UK. The total VAT tax gap was £12.2bn in 2015-16, meaning that although VAT is already an important source of income for the government, it could be much higher without these gaps.
When is VAT charged?
Business earning over £85,000 must register for VAT, and complete a VAT return every quarter. You should register for VAT if your annual turnover exceeds the threshold, which is currently £85,000, or if you think it will soon exceed this. The threshold for VAT may change up to once a year. This happens when the government announces the budget for the upcoming tax year, and therefore this happens at the end of the current tax year – in the spring around March or April. Make sure you check this yearly to avoid complications!
If you add VAT to invoices, make sure you list the VAT amount separately, so that the cost of the products or services sold before VAT can be seen before the final total, with VAT added. This way customers can see what they paid for the service or goods pre-tax. Check out this article on VAT numbers for detailed advice on who needs a VAT number, and how to apply for one.
Once you’re a VAT registered business, selling to other VAT registered businesses is a breeze. It’s easy to add the VAT to your invoice for these transactions, because the business you’re selling to can just reclaim the VAT they have paid already. It becomes slightly more complicated when selling to individual customers. This is because they cannot reclaim VAT, and would essentially be paying 20% more if you add VAT to their invoices. If you think your customers will not pay 20% extra, you may have to find a compromise. Reducing your own profit margins by limiting the price increase to 5%, for example, means that you’re less likely to lose customers, and can increase your prices slowly and steadily to regain the same margin.
Different VAT rates – which products are charged when?
There are currently three rates of VAT in the UK: standard at 20%, reduced at 15%, and zero at 0%. The reduced rates apply to goods such as domestic fuel, and the zero rate to most food and children’s clothing – there is a table below with more detailed examples. The table is by no means a complete list – it is just to give an overview of the range of different products and services that fall into each category. Furthermore, it shows how specific some of these regulations are, as well as how general – because of this, it is always a good idea to speak to a tax advisor when deciding which category your product or service falls into for value added tax charges.
Chocolate covered biscuits
Electricity, gas, heating oil & solid fuel for a business
Privately operated bridge, tunnel, and road tolls
Hot take-away food & drinks
Mobility aids for the elderly
Sanitary protection products
Energy saving materials – only when installed permanently in residential or charity premises
Equipment for disabled people
Public transport fares
Tea, coffee & cocoa
Funeral plan insurance
Medical treatment & care
As we can see, the table shows that some definitions are very broad, such as ‘medical treatment and care’, and others quite specific, such as only chocolate covered biscuits being charged the full VAT rate. Furthermore, this table also shows some instances of when not to charge VAT. The full list can be found at the HMRC website, which shows the VAT rates on different goods and services.
How to calculate VAT
Calculating valued added tax is simple. A pocket calculator is all you’ll need. Alternatively, there are many programs on the internet that make the process easier for you. There are two calculations you may wish to make – VAT-inclusive prices, and/or VAT-exclusive prices.
To work out the price of something you want to sell including the standard VAT rate, all you have to do is multiply the product or service price by 1.2. For the reduced rate (5%) the multiplication is 1.05.
- You sell an alcoholic beverage for £10 , so now multiply this by 2
- The calculation is: 10 x 1.2= 1 The total you should charge including VAT is £1
To work out the price of something without the VAT rate, simple do the opposite of the calculation above – divide the total by 1.2 for the standard rate, or by 1.05 for the reduced rate. You have your pre-tax amount!
- You sell an alcoholic beverage for £12, and need to know the pre-VAT amount.
- The calculation is 12/1.2 = 10. £10 is the pre-tax amount.