VAT – What is VAT?
VAT – short for Value-added Tax – is a tax charged on the value added to goods and services. In many countries, VAT is known as GST.
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As goods and services progress through a supply chain, they increase in value. VAT taxes the value that is added at each stage.
VAT is a consumption tax, meaning that it is paid by the end customer 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 registered for VAT must charge VAT on any taxable sales.
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 VAT registration threshold, you can also opt-in to VAT registration.
When you sell goods outside of the UK, the rules on charging VAT can get a bit complicated. Whether or not you should charge VAT on exports (i.e. export VAT) depends on where the customer is based, whether the customer is VAT-registered, how much you sell, and whether you sell goods or services.
How much VAT should I charge?
VAT is calculated as a percentage of the total value of the good or service.
In the UK, the vast majority of goods and services will fall under the standard VAT rate of 20%. However, some goods and services are classed as VAT-exempt, reduced, or zero-rated. Whether a product qualifies for reduced VAT rates can depend on who is who is selling the product, who is buying the product, where it's provided, and the nature of the product.
If you’re unsure of how much VAT to charge, you can find out more with HMRC's extensive list of reduced and zero-rated goods and services.
When is VAT charged at 0%?
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 should mark the rate as 0%. You must also record these sales in your VAT accounts and report them when filing VAT Returns.
When is VAT charged at 5%?
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.
VAT and invoicing
When you make a taxable sale, you must issue an invoice that includes certain details about VAT, such as your VAT number, how much VAT is due on each product provided, and the total amount of VAT due. If you are not registered for VAT, you do not need to include this information on your sales invoices.
In the UK, it’s common for companies to advertise goods and services at the gross price – that is, including VAT. If you are advertise a product at the net price (i.e. 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 invoicing software helps freelancers and small businesses with all things VAT – from automatically calculating the VAT on your online invoices to sending VAT Returns.
To apply VAT to your invoices and expenses, simply go to your account settings and activate VAT. You’ll then be able to select which VAT rate applies to each product, and each invoice you send will include all of the necessary information regarding VAT.
From April 2019, most companies will need to report their VAT via HMRC-approved Making Tax Digitial software like Debitoor. Users who subscribe to our larger plans will be able to keep digital records of their VAT and submit their VAT Returns directly to HMRC through Debitoor’s MTD integration.
And if you’re not required to follow MTD’s rule for online VAT Returns, you’ll still be able to create VAT reports that help you submit your tax returns manually.