VAT – What is VAT?
VAT – short for Value-Added Tax – is a tax on the value added to goods and services. In the UK, the standard rate of VAT is 20%.
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VAT is a consumption tax, meaning that it is paid by the consumer, rather than the business selling the goods or services.
Do I need to charge VAT?
Businesses can only charge VAT if they are VAT registered. Any business that is VAT registered must charge VAT.
If your VAT taxable turnover is more than £85,000, you need to register for VAT through HMRC. However, even if you don’t reach the £85,000 threshold, you can also opt-in to VAT registration.
How much VAT should I charge?
In the UK, the vast majority of goods and services will fall under the standard rate of 20% VAT. However, some goods and services are classed as exempt, reduced or zero-rated. Whether a product or service qualifies for reduced VAT rates can depend on who’s providing or buying them, where they’re provided, or the nature of the goods or services.
Zero-rated goods and services are usually seen as ‘essential’ items, and can include:
- Children’s clothes or shoes
- Books and newspapers
- Physical education and sports activities
- Building a new house or flat.
Goods or services that qualify for 0% VAT rate are still ‘VAT-taxable’. This means that you must still charge your customers tax, but mark the rate as 0%. You must also record these sales in your VAT accounts and report them when filling in VAT Returns.
Reduced-rate goods and services are usually taxed at 5%, examples of reduced-rate items include:
- Fuel, power and energy for domestic use
- Children’s car seats
- Green energy and energy-saving materials – such as wind turbines or solar panels.
If you’re unsure of how much VAT to charge, HMRC has an extensive list of reduced and zero-rated goods and services.
In the UK, it’s common for companies to advertise goods and services at the gross price – that is, including VAT. If you are advertising the net price before VAT, be sure that this is clearly marked so there’s no confusion about how much your customers need to pay.
VAT and Debitoor
Debitoor accounting and invoicing software helps freelancers and small businesses with all things VAT. From automatically calculating the VAT on your online invoices, to creating VAT reports, Debitoor gives you the tools to stay on top of your taxes and accounting.