What are the most used VAT terms in the UK?
Understanding Value Added Tax (VAT) is essential for business owners, but it can be challenging if you’re not familiar with the key VAT terms related to registration and compliance in the UK.
VAT is a consumption tax that VAT-registered businesses must apply to the price of the goods and services they sell.
This article offers an overview of some of the most common VAT terms you’ll come across. With this information, we hope to make navigating the complex UK VAT system a bit easier for you.
1. Accounting Period
A VAT accounting period, or VAT period, refers to the time a VAT Return covers. Typically, this period spans 3 calendar months, and businesses must submit their VAT Return within 1 calendar month and 7 days after the period ends.
For businesses using the VAT Annual Accounting Scheme, the accounting period extends to 12 months instead of 3. In this case, the deadline to submit the VAT Return is 2 months after the end of the accounting period.
2. Acquisitions
Acquisitions refer to goods a business imports into Northern Ireland from an EU supplier. You may need to account for VAT in the UK on these acquisitions. However, you can reclaim the VAT as input tax on your VAT Return, provided you follow HMRC’s standard rules for recovering input tax.
3. De Minimis Rule
The de minimis rule is a VAT principle aimed at simplifying tax processes for small businesses by exempting them from accounting for minimal (‘de minimis’) amounts of VAT incurred (input tax) on costs related to exempt supplies.
Typically, VAT-registered businesses cannot reclaim such input tax. However, under the de minimis rule, they can recover input tax that would otherwise be non-deductible if:
- Their exempt input tax does not exceed £625 per month on average, and
- The total exempt input tax remains below 50% of the total input tax incurred during the relevant period.
For detailed guidance, consult HMRC’s partial exemption rules in VAT Notice 706.
4. Distance Selling
Distance selling involves selling goods across an EU border under specific conditions:
- The customer is not registered for VAT.
- The supplier arranges or facilitates the delivery of the goods.
This applies to businesses delivering goods:
- From Northern Ireland to customers in EU Member States,
- From EU Member States to customers in Northern Ireland, and
- Between EU Member States.
Distance sales typically involve private individuals but can also include small non-VAT-registered businesses, entities making exempt supplies, charities, and public bodies.
5. Exports
Exports refer to goods that businesses supply:
- From England, Scotland, or Wales to customers outside the United Kingdom.
- From Northern Ireland to customers outside the European Union.
Exported supplies are generally subject to the zero rate of VAT.
6. Input VAT
Input VAT, commonly known as ‘input tax,’ is the VAT you pay when purchasing taxable goods and services.
If your business is registered for VAT in the UK, you can offset the input tax you incurred in the period against the output tax you charged on sales during the same period.
Moreover, you can claim the difference from HMRC if the input tax is more than the output tax.
7. Imports
Imports refer to goods and related costs that your business brings into Great Britain (England, Scotland, or Wales) from non-UK suppliers or into Northern Ireland from non-EU suppliers.
Imported goods are typically subject to the same VAT rates as if supplied within the UK. You can reclaim the VAT paid on these goods as input VAT, provided you follow the usual rules.
8. Output VAT
Output VAT, or ‘output tax,’ is the VAT that VAT-registered businesses charge on the taxable goods or services they sell.
When you register for VAT, you collect this tax on behalf of the government by applying the appropriate VAT rates to your sales prices.
At the end of each accounting period, you must pay the output VAT to HMRC, subtracting any input VAT your business has incurred on purchases during the same period.
9. Place of Supply
The VAT term “place of supply” refers to the location where a business makes a supply of goods or services, determining where those goods or services are subject to VAT.
Different rules apply to determine the place of supply for goods and services.
10. Reverse Charge
The reverse charge applies to cross-border services from non-UK suppliers to UK businesses, excluding exempt supplies.
The VAT domestic reverse charge is a process designed to prevent tax fraud by shifting the responsibility to report and pay VAT from the supplier to the recipient of the goods or services.
11. Supply
‘Supply’ refers to the sale of goods or services, including barter, and is a key VAT term. For VAT purposes, taxable supplies are goods or services sold in the UK that are not exempt from VAT.
A supply of goods occurs when the exclusive ownership of goods transfers from one person to another. A supply of services happens when a service is provided in exchange for payment or compensation.
Taxable Supplies
Taxable supplies include goods and services subject to the standard, reduced, or zero rate of VAT. These are known as standard-rated supplies, reduced-rate supplies, and zero-rated supplies.
Unless exempt, any supply you make is considered taxable, even if your business isn’t VAT-registered. However, if you’re not required to register for VAT and haven’t voluntarily registered, you don’t need to account for VAT on those supplies.
12. Tax Point
The tax point, also known as the ‘time of supply,’ refers to the date when VAT becomes chargeable on a transaction. This date is not always when the supply physically occurs and depends on several factors:
- Whether the business uses accrual accounting (invoice accounting) or cash accounting for VAT
- When the business supplies the goods or services to the customer
- When the VAT invoice is issued to the customer
For cash accounting, the tax point typically occurs when the business receives payment from the customer. For accrual accounting, the tax point generally happens when the business issues the invoice, even if this occurs before or after the supply physically takes place.
You must account for VAT in the VAT accounting period in which the tax point occurs.
13. Taxable Turnover
“Taxable turnover” refers to the total value of your taxable supplies, including all items you sell that are subject to the standard, reduced, or zero rates of VAT.
However, it does not include income from the supply of exempt goods and services, items outside the scope of VAT, or the disposal of capital goods.
Your taxable turnover determines whether your business needs to register for VAT and when it can cancel its registration. If the value of your taxable turnover exceeds the VAT registration threshold in any 12-month period, you must register for VAT.
14. VAT Exempt
A business is considered VAT-exempt if it only supplies goods or services that are either exempt from VAT or outside the scope of the VAT system.
Such supplies do not attract VAT at the standard, reduced, or zero rates, meaning they do not contribute to your taxable turnover for VAT purposes.
If all of the goods and services you sell are exempt or outside the scope of VAT, you cannot register for VAT or recover VAT on your business purchases and expenses.
You can apply for VAT exemption if most or all of your sales are zero-rated. However, doing so means you will not be able to reclaim VAT on purchases and expenses.
Partial VAT exemption applies to businesses making both taxable and exempt supplies. If your business incurs VAT on costs related to both types of supplies, it is partly exempt.
15. VAT Number
A VAT number is a unique tax identification number issued by HMRC to VAT-registered businesses. It is used for various purposes related to VAT, including:
- Identifying the tax status of your business
- Identifying the place of taxation
- Reporting the VAT your business pays on purchases and collects on sales
- Enabling HMRC to track the VAT a business collects from customers and pays to suppliers
- Issuing VAT invoices to customers
In the UK, VAT numbers generally begin with the prefix ‘GB,’ followed by 9 digits, such as GB 123456790.
If your business moves goods between Northern Ireland and the EU under the Northern Ireland protocol, your VAT number will begin with the prefix ‘XI’ instead. For example, XI 123456789.
16. VAT Rates
VAT rates are the official rates that VAT-registered businesses must apply to taxable goods or services (‘supplies’) they sell. These rates are charged as a percentage of a product’s sale price.
In the UK, there are three main VAT rates:
- Standard rate (20%): This applies to most goods and services.
- Reduced rate (5%): This applies to certain goods and services, such as children’s car seats and home energy.
- Zero rate (0%): This applies to essential goods, including most food items, books, and children’s clothing.
VAT rates do not apply to goods and services that are exempt from VAT (‘exempt supplies’) or supplies outside the VAT system (‘out of scope’).
For more details on VAT rates and which items are exempt or out of scope, refer to HMRC’s guidance.
17. Effective Date of Registration
The effective date of VAT registration is when your business becomes liable to register for VAT. This date is determined by when you exceed or realize you will exceed the compulsory VAT registration threshold, currently set at £90,000.
- If your taxable turnover exceeds the threshold in the past 12 months, your effective date of registration will be the first day of the second month after your taxable supplies surpass the threshold.
- If you expect your taxable turnover to exceed the threshold within the next 30 days, the effective date of registration will be the date you first realize this will happen.
If you register for VAT voluntarily, you can choose the date from which you wish to be registered.
18. VAT Return
As a VAT-registered business, you must submit a VAT Return to HMRC at the end of each VAT accounting period. The VAT Return form shows the output tax you owe on sales, minus the input tax you incurred on purchases during that period.
VAT returns are typically due quarterly (every three months), resulting in four returns per year. However, some businesses may opt for monthly returns. Alternatively, businesses that join the Annual Accounting Scheme can submit just one VAT Return per year.
19. VAT Schemes
HMRC offers several VAT schemes to simplify the calculation and reporting process for VAT-registered businesses.
You may be eligible to join one of the following three accounting schemes:
- Flat Rate Scheme
- Annual Accounting Scheme
- Cash Accounting Scheme
Eligibility for these schemes depends on your VAT-taxable turnover and the type of business you operate. Participation in these schemes is voluntary.
Additionally, businesses in retail or those selling second-hand goods may also be eligible for the VAT margin scheme or the VAT retail schemes.
20. VAT Thresholds
The VAT deregistration threshold indicates when a VAT-registered business may be eligible to cancel its registration. Currently, this threshold is £88,000, or £90,000 for businesses in Northern Ireland.
If your business sells goods from Northern Ireland to customers in the EU and the total sales exceed £8,818, you must charge VAT in the country where the goods are delivered. This is known as the distance selling threshold.
Additionally, HMRC sets thresholds for joining and leaving various VAT schemes.
FAQs about common VAT terms in the UK
What is an accounting period for VAT?
An accounting period refers to the 3-month period that a VAT Return covers. VAT-registered businesses must submit the return within 1 month and 7 days after the period ends. For businesses under the VAT Annual Accounting Scheme, this period extends to 12 months.
What are acquisitions in VAT?
Acquisitions refer to goods imported into Northern Ireland from an EU supplier. VAT is typically applied, but businesses can reclaim this VAT as input tax on their VAT return, as long as they adhere to HMRC’s rules.
What is the de minimis rule?
This rule allows small businesses to avoid accounting for small amounts of VAT on exempt supplies if the amount of exempt input tax is below £625 per month or 50% of the total input tax.
What is distance selling in VAT?
Distance selling occurs when a seller arranges delivery of goods sold across EU borders to customers not registered for VAT. It applies to sales between Northern Ireland and the EU or within the EU.
What is the VAT exemption threshold?
If your taxable turnover exceeds £90,000, you must register for VAT. However, businesses with exempt goods or services cannot recover VAT and may not need to register.
What is a VAT number?
HMRC issues a VAT number as a unique identifier to VAT-registered businesses. Businesses use it for VAT reporting, paying, and issuing invoices.
Do you have any other questions?
In this article, we covered key VAT terms in the UK, helping you navigate the complex VAT system. We discussed terms such as accounting periods, input/output VAT, taxable supplies, VAT rates, and VAT schemes, as well as other important concepts like VAT registration thresholds and the reverse charge mechanism. Understanding these terms can simplify VAT compliance for your business, ensuring you avoid errors and stay compliant with HMRC requirements.
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