An Introduction to VAT

In the first of this short series of articles on VAT, our VAT Manager and expert, Paula Mason, guides you through understanding what a taxable supply is, when you need to register for VAT (and what happens if you don’t), advice on completing your VAT return, and some of the many special rules and exemptions that can apply.

What is VAT and how does it apply to your business?

VAT is an indirect tax, where the consumer bears the cost.

Introduced in 1973, it applies to business transactions involving supplies of goods or services where:

• The place of supply is the UK
• Made by a taxable person
• In the course of business

A taxable person is a business who makes taxable supplies and is required to be VAT registered.

What are Taxable Supplies?

Taxable supplies are any supplies that are not exempt from VAT and are categorised as follows:

Then there are Exempt and Outside of Scope Supplies

Registering for VAT

You must register for VAT in the UK if:

• Your total taxable turnover for the last 12 months exceeds £90,000; or
• Your taxable turnover is expected to exceed £90,000 in the next 30 days.

If your taxable turnover is less than £90,000 you can also register voluntarily.

Taxable turnover is the total value of supplies except VAT exempt or outside the scope of VAT supplies. It’s calculated on a rolling 12-month basis.

For businesses located outside the UK making taxable supplies to the UK, there is a nil VAT threshold (Non-Established Taxable Person “NETP”).

If you only make exempt supplies, you cannot register.

When to register for VAT and what happens if you’re late to register?

If your taxable turnover exceeds £90,000 over the last 12 months, then you must register within 30 days of the end of the month in which the threshold was exceeded.

Your effective date of registration is then the first day of the second month after exceeding the threshold.

If you’re expected to exceed £90,000 in the next 30 days, then you must register by the end of that 30 days.  Your effective date of registration here is the date of realisation.

If you register late, then you must pay VAT on any sales made since the date you should have been registered.  Penalties may also apply.

It’s worth noting here that if you only exceed the threshold temporarily, then you can apply for an exception from registration.  If your business consists of zero-rated supplies, you can apply for an exemption from registration.

When to cancel VAT registration?

The deregistration threshold is £88,000 (not applicable for NETP’s), but you should also cancel your VAT registration if:

• You stop trading
• You no longer make taxable supplies
• You join a VAT Group

Keeping on top of compliance – when are VAT returns due?

VAT Returns must be prepared and submitted to HMRC to cover your tax periods.

A standard tax period is 3 months and ends on the last day of the months shown below depending on which group you fall into.

Your group is allocated upon registration but can be changed to fit in with your business financial year through your VAT online account.

• Group 1 – June, September, December and March
• Group 2 – July, October, January and April
• Group 3 – August, November, February and May

The deadline for submission is 1 month and 7 days after the tax period end.  Penalties apply for late submission and late payment.

Alternative Tax Periods

There may be alternative reporting periods depending on your business.

Monthly tax periods can be requested if you’re expecting to receive repayments on a regular basis.

An Annual Accounting Scheme is available for businesses with a taxable turnover of £1.35 million or less.  This consists of advance monthly/quarterly payments and one annual VAT return with final payment.

There’s also a Flat Rate Scheme available for businesses with taxable turnover of £150,000 or less.  The applicable flat rate is based on your business type.

VAT returns – what do I need to complete?

There are 9 different boxes on the VAT return form. Which ones you need to complete and the information you’ll need to complete them will depend on your business and the goods or services you provide.  We can help complete what is needed to help you get it right. Explore our Tax Services.

Place of Supply

The place of supply for the goods or the services you provide will also have an impact on the VAT.

Place of Supply: Goods

For UK VAT to apply, a supply must be made in the UK.  Supplies made outside the UK are outside the scope of UK VAT.

Place of Supply: Services

For business to business (B2B) services, the general rule is that the place of supply is where the customer belongs.

For business to customers (B2C) services (such as private individuals, or bodies with no business activities), the general rule is that the place of supply is where the supplier belongs.

VAT Special Rules

As with most areas of tax, there are some special rules that will apply in certain circumstances or to certain types of businesses.

Land Related Services

The place of supply is where the land is located, e.g. hotel accommodation or the maintenance or repair of a building.

Hire of a Means of Transport

For short-term hires (both B2B and B2C) – the place of supply is where the vehicle is
put at the disposal of the customer.

For long-term B2B hires you follow the general rule. And for long-term B2C hires the place of supply is where the customer belongs.

Services Supplied Where Performed

An admission to an event – the place of supply is where the event takes place.  For catering services, the place of supply is where the catering services are carried out.

B2C services of a professional, technical, financial, intellectual or other intangible nature supplied to customers outside the UK

The place of supply is where the customer belongs, therefore outside the scope of UK VAT. For example, tax advice given by UK accountant to a French resident.

VAT Use and Enjoyment Rules

Additionally, for some services, there are rules around how these are used and enjoyed meaning the place of supply is where the use and enjoyment takes place.

This applies to:

• Letting on hire of goods (including means of transport), e.g. where the goods are used.
• B2B electronically supplied services, e.g. where a business is when purchasing information over the internet.
• B2B telecommunications services, e.g. where a business is when making a telephone call.

The rule applies where the place of supply under normal rules would be either:

• The UK, but services are used and enjoyed outside the UK, or
• Outside the UK, but services are used and enjoyed in the UK.

Reverse Charge

The reverse charge in the UK applies to almost all B2B supplies of services where:

• The place of supply is the UK
• The supplier is not in the UK
• The recipient of the supply is in the UK
• The supply is not exempt

When applicable, the recipient must act as if they are both the supplier and the recipient of the service and therefore must include in the VAT return as both an output and an input.

The Domestic Reverse Charge is specific to the construction industry and you can read more about Navigating VAT on Construction Services here.

VAT Terminology

VAT can be complicated – but there are some terms to know that may help guide your understanding:

You can catch up on our recent webinar, held in partnership with Suffolk Chamber of Commerce & Essex Chamber of Commerce below:

For further help and understanding on any VAT matter, speak to Paula or one of the team by calling 0330 058 6559 or email hello@scruttonbland.co.uk