VAT (Value Added Tax) for Businesses in the UK

Information on the system of Value Added Tax (VAT) in the UK for businesses and the different rates that are applied...

VAT

The system of Value Added Tax (VAT) in the UK is essentially the same as that used in the rest of the EU. There remain, however, some significant and confusing differences of detail between different member states of the EU.

VAT is charged on the supply of goods and services in the UK made by a taxable person in the course of furtherance of a business, unless the supplies are an exempt supply. A UK taxable person is anyone registered or liable to be registered for UK VAT.

VAT is effectively a tax on consumer expenditure so, in theory, the final burden of the tax should not fall on business activity. This objective is achieved by an arrangement known as the input/output system.When a business buys goods or services, it pays VAT to the supplier (input tax). When the business sells goods or services, whether to another business or to a final consumer, it is required to charge VAT (output tax) unless the supplies are specifically relieved from the VAT charge. If the business makes only taxable supplies, it must periodically total the input tax it incurs and deduct this from the output tax charged, paying the balance to HM Revenue and Customs. The result of this is that the final consumers bear the cost of VAT on the final price of the goods or services they purchase.

There are three rates of VAT on taxable supplies in the UK:

  • standard rate 20%;
  • zero rate;
  • a 5% reduced rate that applies to limited goods and services.

Unlike some EU member states, the UK has a fairly high VAT turnover registration limit (currently £79,000 from 31 March 2013). This means that a large number of small turnover businesses are not within the VAT system.

A taxable person is liable to register for VAT if their combined value of taxable supplies in the UK exceeded the registration limit in the preceding 12 months, or there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone will exceed the registration limit. A business may also de-register if the anticipated value of the taxable supplies in the next 12 months is less than the UK de-registration limit (currently £77,000). It is highly likely that a company seeking to set up in the UK will wish to register for VAT or be required to do so. The registration process requires the non-resident company to complete a registration form verifying the basis under which it will become a taxable person and provide evidence of its taxable business activities.

As of 1 December 2012, the VAT registration threshold for non-established businesses making taxable supplies in the UK is nil. Non-established businesses making taxable supplies in the UK are immediately registerable. The registration should normally be processed in three to six weeks.

The standard VAT reporting requirement for a company/branch following registration is to submit returns to HMRC every three months. If a business wants to recover its input VAT more quickly, it may request permission to submit monthly VAT returns. There are other returns that will need to be completed if a UK based business trades with customers/suppliers located outside of the UK.

Information supplied by PriceWaterhouseCoopers PWC, 1 Embankment Place, London, WC2N 6RH Contact: Mike Curran | Tel: 0207 213 8190 | e-mail or Dipan Shah | Tel: 0207 804 0685 | e-mail