Value added tax was introduced in the UK on 1st April 1973 by the Finance Act 1972. Successive Finance Acts have made amendments to the law which has also been consolidated, most recently by the Value Added Tax Act 1994.
HMRC and the Law
HMRC issue explanatory notices on VAT, together with VAT notes, news releases and briefs. These explain how to interpret the law. With certain exceptions, these are not part of the law and this should be borne in mind where the manual indicates a notice or leaflet.
If a taxable person disagrees with the interpretation, he has the right of appeal, in certain cases, to the First-Tier tribunal.
What is VAT?
VAT is a tax on consumer expenditure and is collected on business transactions and imports/ acquisitions. The basic principle is to charge VAT at each stage in the supply of goods and services (output tax).
If the consumer is registered for VAT and uses the supplies for taxable business purposes, he will receive credit for this VAT (input tax).
As a result, most businesses are not affected, and VAT is borne by the final consumer.
What rate of VAT do I charge?
There are currently three main rates of VAT which are as follows;
1. Standard Rate – 20%
2. Reduced Rate – 5%
3. Zero Rate – 0%
Although the amount of VAT to apply is nil on a zero-rated supply, it is still a taxable supply. This means any zero-rated sales must be considered when determining if registration is required (currently £85,000 of turnover). Secondly any related input tax on a zero-rated sale may be reclaimed.
Some supplies are exempt from VAT. Again, like zero-rated no VAT is chargeable however the difference is that any related input tax to an exempt supply cannot be claimed.
Am I in the scope of VAT?
A transaction is only within the scope of VAT if ALL the following conditions are met;
1. It is a supply of goods and services.
2. It takes place in the UK.
3. It is made by a taxable person.
4. It is made in the course of furtherance of any business carried on by that person.
5. It is a taxable supply i.e. Standard, reduced, or zero-rated.
As a trader, it is important for you to establish if your transaction is within the scope of VAT. If your transaction does not meet all the conditions stated above, it is outside the scope of VAT. The above conditions need to be explored and understood in more depth to ensure you are compliant with the law.
Tax Legislation provides a VAT rate for most transactions and this is important to get right especially when you are selling to the end consumer.
Finally, understanding the concept of VAT is important. This will allow you to plan how this tax may affect you commercially or in some cases may assist in your cash flow.
General Disclaimer: This article is intended to provide general information only. The article is not intended as, and should not be taken as, financial, tax, legal, consulting, or any other type of advice. This article does not establish any contractual or engagement.