When Do I Have to Charge VAT?

The British VAT system is amongst the most complicated in the world. The tax schedule that must be understood by every business owner is quite oblique, with different products attracting different rates – and many attracting no tax at all.

The situation has been further complicated by recent changes to the VAT rate. Following an extended period at which the headline rate was set at 17.5 per cent, the government reduced VAT to 15 per cent to combat the effects of the recession. It has since returned to 17.5 per cent, leading to cost and confusion for many small businesses.

There are two important elements of the VAT schedule with which all business owners must be familiar. These are the rules regarding compulsory registration, and the rules regarding which products attract which rates.

Compulsory Registration

Many businesses are forced to register for VAT. If your turnover in the previous 12 months exceeds £68,000 you must register for VAT. This is a legal requirement. Similarly, if you take over a business and your combined turnovers exceed this figure, you must also register. Finally, registration is also compulsory if you acquire goods from other EU countries, and the value of these goods exceeds £68,000.

It is also possible to voluntarily register for VAT. You may wish to read our article on deciding when to register for more information.

Rates of VAT

Once registered, you must understand which products and services are liable for VAT, and at what rate. Products and services will fall into one of four categories

• Standard rate – 17.5 per cent
• Reduced rate – 5 per cent
• Zero rate – 0 per cent
• Exempt

It would be impossible to provide a comprehensive guide to the products and services that fall into each category. Most items will attract VAT at the standard rate, but there are significant and manifold exceptions to this. For example, most food and drink is zero-rated – but items like confectionary, alcoholic drinks and ice cream are all standard rated.

As a business owner it is your responsibility to find out the correct rate for each of your products and services. There is further guidance available on the HMRC website, including a very lengthy list of exempt items.

Reduced Rate Items

As well as understanding how much VAT you must charge, you should also note the VAT that you are paying. This will have an important impact on your outgoings when you come to the end of each VAT period.

While most supplies purchased by businesses will attract VAT at the standard rate, some important items fall into the reduced rate category and therefore attract VAT at 5 per cent. Most fuel and energy saving items are charged at the reduced rate, along with heating units and some construction services. Utilities like sewerage and water to households are zero-rated – but water supplied to businesses may be standard-rated, depending on your premises.

It is important that you factor in variations in rates if you are considering voluntary VAT registration, in order to ensure that you do not create unnecessary expense.

The VAT schedule is exceptionally complex. If you are confused, and particularly if you are considering VAT registration for the first time, you should seek personal advice from an accountant.