Back To Top

Your Lowtax Account


World VAT and Sales Tax Guide

United Kingdom



A guide to VAT And Sales Taxes in the United Kingdom, covering everything from rates, exemptions, and thresholds, to information on records and invoices, VAT returns, payments, refunds, assessments, and penalties.

(a) General information

EU member state

Yes

Name of tax

Value Added Tax (VAT)

Date introduced

1 April 1973

Principal legislation

  • Value Added Tax Act 1994 (VATA)
  • Value Added Tax Regulations 1995
  • The VAT Directive (Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax)

Tax authority

Her Majesty's Revenue & Customs (HMRC)

Geographical limits

The United Kingdom (UK) and also the Isle of Man. Note that VAT does not apply to the Channel Islands.

Taxable supplies

HMRC levies VAT on: the supply of goods and services by UK taxable persons, including UK branches of foreign entities; the acquisition of goods from other member states of the European Union (EU); and the import of goods from outside of the EU. VAT is collected at each stage of the process of production or distribution of goods and services, but the burden of the tax ultimately falls on the consumer. Self-supplies of goods and services and the transfer of own goods may also be taxable supplies.

Taxable person

A taxable person is one that is, or is required to be, registered under the VATA and may be an individual, partnership, company, club, association, charity or other entity buying or selling goods or services, including sole traders and professionals independently exercising their trades or professions (that is, not as employees).

(b) Tax rates and exemptions

Standard rate

20%

Supplies are standard rated unless a reduced rate applies, including transfers of goodwill, machinery and stock, unless these form part of a business purchased as a going concern, in which case they are outside of the scope of VAT. The standard rate applies to the import of goods in respect of acquisition tax and import VAT.

Reduced rate

5%

There is a reduced rate for fuel and power supplied for domestic or non-business charity use; and certain other supplies, principally of a socially beneficial nature.

Zero rate

0%

Certain supplies of goods and services are taxable at a zero rate, particularly the export of goods and certain exports of services from the UK, and the construction of residential property; and also include bank notes, books, caravans (excluding holiday caravans), houseboats, charities, clothing and footwear, drugs and medical devices, food (excluding hot food), gold, international services, sewer services and water, books and audio devices for the blind, tax-free shops and transport.

Exempt

N/A

Exempt supplies of goods and services include land (but see below), insurance, postal services, betting, gambling and lotteries, finance, education, health and welfare, burial and cremation, subscriptions to trade unions, professional and other public interest bodies, sports, sporting competitions and physical education, works of art, and fundraising events conducted by charities.

Option to tax

Yes

A taxable person can opt to waive the VAT exemption (that is, opt to tax) in respect of certain real estate transactions by businesses.

Outside the scope of UK VAT

N/A

Certain transactions are subject to neither the standard rate, nor any reduced rate and are not, strictly speaking, exempt, that is, they are outside the scope of UK VAT, because they are deemed not to constitute any kind of economic activity. These principally include non-business transactions between persons not registered for VAT (for example, occasional sales of personal effects by private individuals). However, taxable persons may carry out such transactions, including:

  • transfers of a business as a going concern
  • voluntary donations made to charities
  • welfare services provided by charities at prices that are significantly below cost
  • the imposition of tolls for the use of roads, tunnels and bridges operated by state authorities, and
  • the export of services to non-EU countries.

(c) Records and invoices

Retention period

Six years, or for a shorter period that HMRC may allow in writing.

Place and form of storage

For record keeping purposes, accounting records may be stored outside the UK, but HMRC must be able to access those records if necessary. Records may be kept in electronic form.

Invoices

For domestic transactions, VAT invoices must be uniquely and sequentially numbered, and state if the supply falls within a margin scheme or is exempt. Specific invoicing requirements also exist for exports and intra-community transactions. Electronic invoices can be used. Invoices must be in English and be expressed in Sterling or Euros. There are also rules for simplified invoicing and summary invoices.

(d) VAT registration/deregistration and VAT registration thresholds

Residents

£79,000

The registration threshold for VAT registration applies to taxable supplies, including zero-rated supplies (but not exempt supplies). If taxable persons make or intend to make taxable supplies below this threshold, they may register voluntarily to reclaim input VAT. Unregistered businesses, which become liable for registration, should notify HMRC within 30 days of the end of the relevant month. UK businesses may register online (www.online.hmrc.gov.uk/registration), but may still register or deregister in writing.

Non-residents

£0, £70,000 & £73,000

Non-resident businesses (except those with a business place of establishment in the UK) making taxable supplies (including zero-rated supplies) are required to register for VAT regardless of the amount of their taxable supplies. However, this does not apply to the following non-resident businesses making the following sort of supply to which different registration thresholds apply:

  • distance selling to the UK from other member states (£70,000), and
  • intra-community acquisitions (£73,000).

Non-resident businesses may register online if they have an accountant authorized to act on their behalf; otherwise they should register by post to:

Non-Established Taxable Persons Unit (NETPU)
HM Revenue & Customs
Ruby House, 8 Ruby Place
Aberdeen, AB10 1ZP

Penalties

N/A

There are penalties for both resident and non-resident businesses if they fail to register for VAT when required to do so. These are calculated as a percentage of VAT due (output VAT less input tax) from the date they should have been registered to the date when HMRC received notification or became fully aware that they were required to register. The following penalties apply:

  • 5% for businesses registered less than nine months late
  • 10% for businesses registered nine to 18 months late, and
  • 15% for businesses registered more than 18 months late.

(e) VAT returns, payments, refunds, assessments and penalties

VAT returns

VAT returns are normally filed quarterly and are due one month after the end of the relevant VAT quarter (tax period), although some returns are made monthly or annually. Electronic filing and payment is generally mandatory. In addition, taxable persons must file Intrastat returns and EC sales lists. Electronic filing of these is also mandatory.

Payments

The VAT payable for any tax period must be paid no later than the end of the month immediately after the end of the relevant tax period. An extra seven days is given when payments are made by direct bank transfer; and if payment is made by online direct debit, an extra three days is allowed. The amount of VAT owed must be expressed in Sterling or Euros; but payments may only be made in Sterling.

VAT refunds

A taxable person may claim VAT refunds on the filing of the monthly, quarterly or annual VAT return. A foreign person must make the claim no later than nine months of the end of the calendar year in which the input VAT was incurred and must cover any VAT incurred over a period of at least three months, but must not be for more than a full calendar year (unless this is all that remains). The claimant may also include items missed on earlier claims, if they relate to VAT charged in the year of the claim. The minimum amount reclaimable for a period of less than a calendar year is £295; if the claim covers a calendar year or the remainder of a calendar year, the minimum is £35 (£130 and £16, respectively for claims by persons from third countries). All claims for refunds of UK VAT by a person established in another member state must be made electronically using the website of their own tax authority. This applies to UK persons claiming refunds of foreign EU VAT.

Assessments

If taxable persons fail to submit a VAT return, the amount of VAT owed will be assessed and a surcharge will be calculated as a percentage of that amount. There is no surcharge if they pay VAT on time, but submit their VAT return late, or the late return shows zero VAT payable or an amount that is refundable.

Penalties

Each time taxable persons default, they are sent a Surcharge Liability Notice Extension, which warns them that, if they default for a prescribed accounting period ending within a specified period (the surcharge period), they may be liable for a surcharge. The period begins on the date of the notice and ends 12 months from the end of the last period in default. If taxable persons default during a surcharge period, and there is VAT outstanding for the tax period in default, they will incur a surcharge. For the first late payment during a surcharge period, the surcharge is 2% of the outstanding VAT at the due date. The rate of surcharge will then increase progressively to 5%, 10% and 15% for further payment defaults in a surcharge period. There is a minimum surcharge of £30. HMRC only applies this rule to surcharges calculated at the 10% and 15% surcharge rates and does not issue a surcharge at the 2% and 5% rates if the amount owed is less than £400. The penalties for non-payment are the same as the penalties for late payment.

(f) Fiscal representatives

If a business is not established nor has a permanent establishment in the UK, it may appoint a fiscal representative based in the UK to act on its behalf, but may only appoint one person at any time (although a fiscal representative may act for more than one principal). A non-established business and the person to be appointed as the fiscal representative must complete a Form VAT1TR. This form authorizes HMRC to accept that someone else is acting on behalf of the non-established business. A non-established business can prepare its own VAT return or engage its fiscal representative to do so. A fiscal representative needs a power of attorney or a letter of authority before acting and receiving money. A VAT representative must keep VAT records and accounts, as well as account for UK VAT on behalf of the business represented. The representative is jointly and severally liable for any VAT debts incurred by the business; and must keep separate VAT accounts and make separate VAT returns for each if its principals.

(g) Reverse charge rule

Transactions with non-UK suppliers

A reverse charge mechanism applies in the UK in which the liability for acquisition or import tax shifts from the supplier to the customer when a foreign supplier:

  • makes a cross-border supply to a business in the UK, or
  • provides a service relating to:

    • land and property, or
    • cultural, artistic, sporting, scientific, educational, entertainment and the like.

Transactions with purchasers in another member state

From 1 January 2015, supplies of telecommunications, broadcasting and e-services made by UK business to private buyers in another member state will be taxable in the country where the buyer is located. To avoid registering for VAT in each member state where these customers are located, it will be possible to account for these sales on a UK VAT return. Details and monies will then be passed to the VAT authorities in the relevant countries automatically, using an IT system called the "Mini One Stop Shop".

Internal UK transactions

A similar reverse charge rule applies to supplies made within the UK of:

  • mobile telephones with a value above £5,000 (excluding VAT)
  • computer chips with a value above £5,000 (excluding VAT), and
  • emissions allowances of any value.

This rule only applies to supplies if the customer is registered, or should be registered, for VAT in the UK and is buying the goods or services for a business purpose.

(h) Place and time of supply

Time of supply

Generally, the tax point for supplies of goods if no VAT invoice is issued (such as retail sales) is the date on which the good is actually (physically) supplied to the customer. The tax point for supplies of goods if a VAT invoice is issued (that is, most business-to-business (B2B) supplies) is usually the invoice date, regardless of when the actual supply of the goods took place.

The tax point for supplies of services if no VAT invoice is issued (e.g. business-to-consumer (B2C) supplies) is the date on which the service is actually (physically) supplied to the customer. The actual supply of a service is deemed to take place on the date when the service is actually carried out. For services performed over a longer period, the tax point is the date on which the service is completed. The tax point for supplies of services if a VAT invoice is issued (that is, most B2B supplies) is generally the invoice date, regardless of when the actual service was performed.

Certain exceptions apply to these general rules.

Place of supply

In cross-border transactions, the general rule is as follows. For goods or service supplied to:

  • a business customer, the supply is deemed to take place where the customer belongs.
  • a non-business customer, the supply is deemed to take place where the supplier belongs.

(i) Special schemes and rules

Annual accounting scheme

A business using the annual accounting scheme makes provisional installments of VAT at fixed amounts throughout a particular year, followed by a final balancing settlement, which is made within two months of the end of the business accounting year. A business whose taxable turnover for the following year is estimated to be less than £1.35m (excluding VAT) can generally use this scheme and can use it for as long as its turnover does not exceed £1.6m (excluding VAT).

Call off stock

The UK has a regime of call-off stock relief in which the transfer of call-off stock is treated as a B2B intra-community supply not giving rise to any VAT obligations for the foreign supplier in the UK. The transfer of the goods constitutes an intra-community acquisition by the customer.

Cash accounting scheme

A cash accounting scheme applies to businesses whose taxable turnover for the next year is estimated to be less than £1.35m (excluding VAT). They may continue to use it for as long as their turnover does not exceed £1.6m (excluding VAT).

Fiscal warehouse

The UK's fiscal warehousing regime allows the goods listed in Annex V of the VAT Directive (regardless of where they originate) to be supplied free of VAT, unless and until they are removed from the relevant warehouse (at which point they become taxable). In addition, services such as packing, cleaning goods and storing within such a warehouse may also be free of VAT.

Flat rate VAT schemes

Businesses, whose estimated VAT turnover (excluding VAT) in the following year will be less than £150,000, can use one of several flat rate schemes and may continue to use it until its annual turnover exceeds £230,000. The flat rate applied depends on the type of business.

An agricultural flat rate addition scheme also applies to farmers that do not register for VAT. These are compensated for their input VAT by means of a 4% flat-rate addition to the prices at which they sell their agricultural produce and services to taxable persons.

Investment Gold

The UK follows the provisions of the VAT Directive, which harmonized the VAT treatment of investment gold by placing a general VAT exemption on its supply, intra-community acquisition and importation.

Margin schemes

There are special margin schemes for tour operators and also supplies of second-hand products, works or art, antiques and collectibles. These allow VAT to be accounted for solely on the amount representing the difference between the purchase price of a good and the price at which it is resold to a customer.

Mixed supplies

The consideration payable in connection with goods or services supplied as a package in what is known as a multiple supply should be apportioned between each of the individual elements. VAT applies to these elements at the rate that would apply to them if they were sold separately. However, in connection with certain categories of supplies referred to as composite supplies, VAT is chargeable at the rate applicable to the principal element.

Partial exemption

Partly exempt persons may deduct the full amount of exempt input VAT if both of the following conditions are satisfied:

  • the amount of exempt input VAT does not exceed (on average) £625 a month, and
  • the amount of exempt input VAT is less than half of the total input VAT in a particular tax period.

If the exempt input VAT incurred by a taxable person is more than the above, only a partial deduction of input VAT can be made using a partial exemption method. This amount of deductible input VAT must be proportionate to the value of taxable supplies made in a particular tax period.

Retail schemes

UK VAT retail schemes apply to retail businesses that can choose from a number of pre-established standard schemes or may agree a bespoke scheme with HMRC. If the annual retail turnover of a business exceeds £130m (excluding VAT), only a bespoke scheme may be used.

Transfers of means of transport

The UK broadly follows the special EU rules on the VAT treatment of certain cross-border transfers of new and used means of transport taking place within the EU. These determine which member state is entitled to charge VAT (subject to some differences in the definition of "means of transport").

Triangulation and chain supplies

There are specific rules simplifying triangular supplies and a partial simplification for chain supplies. Broadly, these zero-rate a supply taking place between the first supplier and an intermediate party, and by reverse-charging the supply between the intermediate party and its customer (the recipient of the goods).

VAT exchange rates

Goods and services may be freely acquired from another member state or imported from outside the EU at prices expressed and paid in foreign currencies, but must be converted into Sterling for VAT accounting and record-keeping purposes. There are two accepted methods for currency conversions using:

  • the UK market selling rate, or
  • the period rate of exchange.

VAT groups

Broadly, two or more companies or limited liability partnerships may register as a VAT group if:

  • each of them has its principal or registered office in the UK, and
  • they are under common control.