What is VAT?
VAT is an acronym, it stands for value-added tax.
In the UK, VAT was introduced in 1973. It replaced Purchase Tax; a consumption tax that ran from 1940 and which aimed to help reduce wastage of raw materials during the Second World War.
VAT is considered an indirect tax. This is because it is handed over to the government by the seller of the goods/services, rather than the consumer who is responsible for paying the tax.
The current VAT rate in the UK stands at 20%. According to EU law, the standard rate of VAT for any EU state cannot be lower than 15%.
Following the UK’s depature from the EU on December 31st 2020, the UK government now has full control over what VAT rates are set. They also have the ability to abolish/replace VAT with an entirely new system (although this is very unlikely).
The Purpose of VAT
Following Income Tax and National Insurance, VAT is the UK government’s third highest revenue source.
The government collects billions of British pounds in tax each year. From 2018-2019, for example, the total value of HMRC tax receipts amounted to approximately £623,400,000,000 (623.4 Billion British Pounds).
This money is then redistributed and used to help fund a variety of sectors. Some of the more highly funded sectors include Social Protection, Health, Education, Defence, Public Order & Safety and Transport.
How VAT Works
By law, all UK businesses that provide “taxable goods” (see below for examples), must be VAT registered. This is providing that their taxable turnover exceeds the threshold. This currently stands at £85,000.
By law, all UK businesses that provide “taxable goods” (see below for examples), must be VAT registered. This is providing that their taxable turnover exceeds the threshold. This currently stands at £85,000.
Businesses that are UK registered must charge VAT on the goods they sell. This must then be paid over to HMRC (this is referred to as output tax).
Output tax may also be offset with VAT incurred by the business on any purchased goods/services related to their own taxable supplies (this is referred to as input tax).
HMRC also runs a Flat Rate Scheme. According to this scheme, businesses with a turnover of less than £150,000 per annum, can pay HMRC a fixed turnover percentage every three months.
Calculate Your VAT Rates
If you need help working out VAT, you can use our free and easy online VAT calculator. This will allow you to add or remove VAT in GBP. You can even copy the values for quick and simple data management.
If you find the tool useful, all we ask is that you share it with people you think will also find it beneficial. The calculator is free to use and always will be!
Examples of Taxable & Non-Taxable Goods
Depending on the type of goods or service in question, VAT can be charged at standard rates, reduced rates, zero rates or be exempt altogether.
Standard Rate
Here are some examples of goods or services taxed at the standard VAT rate:
- Alcoholic Drinks.
- Chocolate
- CD’s, DVD’s & Video Games.
- Taxi Fares.
- Water (industrial & bottled).
- Electrical Goods.
Reduced Rate
These are some examples of goods or services which are taxed at a reduced VAT rate.
- Car Seats for Children.
- Smoking Cessation Products
- Sanitary Protection Products.
- Electricity, Gas, Heating & Solid Fuel.
Zero Rate
These are examples of goods and services that are taxed at a rate of 0% VAT. They must still be recorded on VAT accounts and reported on VAT returns.
- Bicycle & Motorcycle Helmets.
- Books, Maps & Charts.
- Eggs.
- Meat & Poultry.
- Newspapers, Magazines & Journals.
- Water (Household).
- Donated Goods Sold at Charity Shops.
- Public Transport Fares.
VAT Exempt
These are examples of goods and services that are exempt from VAT. They do not need to be recorded on VAT accounts or reported on VAT returns.
- Antiques, works of art, etc. (when sold to public institutions).
- Burial/Cremation (of humans).
- Gambling.
- TV License.
- Postage Stamps.
- Insurance.
- Membership Subscriptions.
