VAT - Introduction

What is VAT?

VAT stands for value-added-tax. It is the tax added to the value of products & services that are bought and sold which is then passed onto the relevant government by the final seller.

VAT is used throughout Europe.

As a UK-VAT-registered business, all of the output VAT received from UK-sales is passed onto HMRC, but all input VAT paid out on UK-purchases can be reclaimed from HMRC. This is done through a VAT Return submitted to HMRC.

VAT Rates

Each European country sets it’s own VAT rules and VAT rates. So the same product may need different VAT rates applied to it depending where it is being sold to.

If a UK individual or UK business is buying something from a UK VAT registered business then the standard rate of VAT is 20%, however some goods and services are sold with a lower rate of 5% and there are some products & services which are exempt from VAT (see below for examples).

When and how do I register for VAT?

UK businesses that have

UK-VAT-taxable turnover⁠

(the sum of all turnover, only excluding VAT-exempt sales, and goods or services you supply outside of the UK) of more than £85,000 need to register with HMRC. This is done on the

gov.uk website⁠

UK businesses that sell ANY goods or services into the EU need to register as a ‘non-Union’ taxpayer with the tax authority of any EU member state and register for the Non-Union VAT OSS Scheme to file quarterly OSS filings like any EU ecommerce seller. Since 1 July 2021 there is NO MINIMUM threshold for EU turnover. There is a requirement to file a regular domestic VAT return in at least one EU member state. VAT incurred on imports may be declared in the OSS, too. There are intermediary businesses who can help you to get all this set up, such as

Avalara⁠

VAT Record Keeping

For audit purposes, you should typically only reclaim VAT on purchases where you have a valid VAT invoice or receipt. For example, it should have the following information;

Supplier's name & address

Supplier VAT number

Description of the goods or services and the VAT rate of each item.

More information on VAT record keeping can be found

here⁠

Practically, where no invoice is available, you can compare to previous invoices and code with the same VAT rate, or check the supplier's website for details of whether they are VAT registered.

❗ In most accounting software, transactions coded directly to the VAT account will not appear on the VAT return, only transactions assigned to a VAT code where VAT is then calculated are included. It's sometimes worth checking that manual journals have the correct VAT coding.

VAT Returns

What is a VAT Return?

A VAT return is a record of the VAT on all sales less the VAT on all purchases in a period, usually a quarter, that is submitted to a tax organisation (HMRC in the UK or the relevant tax authority in any of the EU member states) to calculate how much VAT a company can reclaim or needs to pay back for that period.

What is VAT?

VAT Rates

When and how do I register for VAT?

VAT Record Keeping

VAT Returns

What is a VAT Return?

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