The basics of Value Added Tax (VAT)
VAT is a tax on spending by consumers. It is collected on business transactions, imports and acquisitions from other EU member states. Most business transactions involve supplies of goods or services. VAT is payable if the supplies are made in the UK or other EU countries; they are made by a taxable person; they are made in the course of business; and they are not specifically exempted or zero-rated.
Supplies which are made in the UK or other EU countries and which are not exempt are called taxable supplies.
A taxable person is an individual, firm, company etc who is, or is required to be, registered for VAT. A person who makes taxable supplies above certain value limits is required to be registered.
A person who makes taxable supplies below these limits is entitled to be registered in the UK on a voluntary basis, if for example, they wish to recover VAT incurred in relation to these taxable supplies.
Furthermore, a person who is not registered for VAT in the UK but acquires goods from another EC member state, or makes distance sales in the UK, above certain value limits may be required to register for VAT in the UK (and such persons may register voluntarily if their acquisitions or distance sales are below these limits).
Currently there are three rates of VAT in the UK:
1. a standard rate, currently 15% which will go back up to 17.5% on 1 January 2010.
2.a reduced rate, currently 5%; and
3.a zero rate.
Supplies at the reduced VAT rate
Supplies of these goods and services are currently charged at the reduced rate:
-domestic fuel or power;
-installation of energy saving materials;
-grant funded installation of heating equipment or security goods or connection of gas supply;
-renovation and alteration of dwellings;
-residential conversions;
-women’s sanitary products; and
-children’s car seats.
Supplies at the “zero” VAT rate
VAT is not payable on zero-rated supplies, and an invoice for a zero-rated supply will not constitute a VAT invoice.
However, zero-rated supplies are treated as taxable supplies in all other respects, including the right of the person making the supply to recover the VAT on their own business expenditure subject to certain restrictions.
“Exempt” supplies
Some supplies are exempt from VAT, which means that no tax is payable – but, equally, the person making the supply cannot normally recover any of the VAT on their own expenses.
How VAT works
If you make standard-rated supplies, you have to account to HM Revenue & Customs (HMRC) for the VAT due. This is your output tax. You will normally charge the VAT to your customers.
If your customers are registered for VAT and the supplies are for use in their business, the VAT is their input tax. In the same way, VAT charged to you on your business purchases is your input tax.
As a registered person, you can reclaim from HMRC as much of the VAT on your purchases, and imports, as relates to the standard-rated, reduced-rated and zero-rated supplies you make. In principle, you cannot reclaim VAT which relates to any non-business activity or to any exempt supplies you make.
VAT is a complex area with many pitfalls for the unwary. You may not be aware that you ought to be charging VAT in some situations even though you do not have any presence in Europe. Alternatively, you may not realise you are incurring “irrecoverable” VAT which might otherwise be avoided if you had taken certain steps before undertaking the transaction. Standard rates of VAT in the European Union vary from 15% to 25% and do remember thats based on turnover and not profits! As a result your profit margins could be eliminated completely if you were not prepared beforehand.
Therefore it is critical to take proper advice before embarking on the supply of goods or services into the EU. RKG Consulting will be pleased to assist you in this regard and to counsel you on all VAT matters.