What rate of VAT do you have to pay?
Last week’s post talked about “VATable sales” and “exempt sales”.
What on earth are those?
Read on and I’ll explain.
VAT is a tax on sales - but not all sales have VAT on them. And just to be even more awkward, and not all those that do, have the same rate of VAT!
Sales being “subject to VAT” just means that if a business making those sales is VAT-registered, then they would charge output VAT, at the appropriate rate, to their customers on those sales. Businesses that aren’t registered for VAT don’t charge output VAT to their customers on any of their sales.
More about how businesses charge output VAT next week.
Most sales of goods and services in the UK are subject to VAT at the standard rate.
check the current VAT rate on our UK tax rate tracker
The historic rates are also available in FreeAgent if you're catching up with your books.
Some quasi-essential goods and services are subject to VAT at the reduced rate.
That means things like domestic gas and electricity, children’s car safety seats, and products to help people stop smoking, such as nicotine patches - things we could just about do without but it’s not a good idea.
There are also some goods and services which are zero-rated for VAT.
That’s confusing because these goods and services are subject to VAT, there is VAT on them - but the rate of VAT is 0%!
Zero-rated goods and services include baby and children’s clothes, printed material such as books, magazines and newspapers, and also travel, such as air and train fares.
Watch out for confusing anomalies, though.
If printed material is zero-rated, doesn’t that mean that printing of letterheads and posters is zero-rated?
I’m afraid not. It’s standard-rated!
That’s why on FreeAgent there are separate categories for printing (which is in the list of standard-rated categories) and for books and journals (which is in the zero-rated list).
And even though most travel is zero-rated, there has to be one thing that’s different - car parking tickets are standard-rated!
If you’re not sure, check HMRC’s website, or ask your accountant.
And be prepared to change FreeAgent’s Auto VAT setting if you encounter something that’s different from the norm in its category.
OK, so what counts as VATable sales?
Sales of standard-rated, reduced-rated and zero-rated goods and services all count as VATable sales.
So when you’re checking your annual sales to see if they go over the VAT limit (currently £73,000, as from 1st April 2011), you need to add up your standard-rated, reduced-rated and zero-rated sales.
Don’t be tempted to leave out zero-rated sales thinking they’re not subject to VAT.
Remember zero-rated sales are subject to VAT - just at a rate of 0%!
Sales being exempt from VAT is not the same as them being zero-rated, although mathematically it’s the same.
On exempt sales, no VAT is charged at all, as distinct from zero-rated sales where VAT is charged but at 0%.
So when you add up your VATable sales to see if they’re going to go over the limit, you include zero-rated sales but exclude exempt sales.
And if your business only makes exempt sales, you’ll never be able to register for VAT, because you’re not making any VATable sales.
Exempt sales include education, medical care provided by a hospital, hospice or nursing home, and health services provided by doctors, dentists, opticians, pharmacists etc.
But guess what, there are anomalies here as well.
For example, dispensing of prescriptions by pharmacists is zero-rated!
So always check with HMRC or with your accountant if you’re not sure.
Outside the scope of UK VAT
And as if that wasn’t confusing enough, there’s yet another category to include - that’s sales which are outside the scope of the UK VAT system altogether.
This includes some sales abroad, but also includes some UK services - for example sales of vehicle MOTs are outside the scope of UK VAT.
Again, you wouldn’t include sales that are outside the scope of UK VAT when you’re adding up your VATable sales to see if you need to register for VAT.
And there are a great many anomalies. This is what makes VAT so complicated!
Have you wondered why, if you buy a cake at Starbucks, it’s cheaper if you take it out than if you eat it in?
Because if you eat it in, it’s standard-rated as food supplied in the course of catering - but if you take it out, it’s zero-rated as take-away food that isn’t designed to be eaten hot!
So be very careful and always take professional advice!
- Video: an introduction to VAT by HMRC
- You deserve better: why you need to break up with your spreadsheet
- Simple ways to save yourself future Self Assessment stress
- Making Tax Digital consultation response published
- Not feeling (a) fine? You might have a ‘reasonable excuse’ for not completing your tax return