Businesses and charging VAT
Business: Business Tax
VAT for business – VAT rates, exempt and zero-rated items, when to charge VAT, discounts and VAT on offers
1. How VAT works
You can only charge VAT if your business is registered for VAT.
VAT is charged on things like:
- business sales - eg when you sell goods and services
- hiring or loaning goods to someone
- selling business assets
- commission
- items sold to staff - eg canteen meals
- business goods used for personal reasons
- ‘non-sales’ like bartering, part-exchange and gifts
These are known as ‘taxable supplies’. There are different rules for imports and exports and charities.
Responsibilities
VAT-registered businesses must:
- charge VAT on their goods or services
- reclaim any VAT they’ve paid on business-related goods or services
If you’re a VAT-registered business you must report to HM Revenue & Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.
You must account for VAT on the full value of what you sell, even if you:
- receive goods or services instead of money (eg if you take something in part-exchange)
- haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT
If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.
2. VAT rates
There are 3 different rates of VAT and you must make sure you charge the right amount.
Get a list of reduced or zero-rated goods and services.
Standard rate
Most goods and services are standard rate. You should charge this rate unless the goods or services are classed as reduced or zero-rated.
Reduced rate
When to charge this rate can depend on the item being provided but also the circumstance of the sale. For example:
- children’s car seats and domestic fuel or power are always charged at 5%
- mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home
Zero rate
Zero-rated means that the goods are still VAT-taxable, but the rate of VAT you must charge your customers is 0%. Examples of zero-rated goods include:
- books and newspapers
- children’s clothes and shoes
- motorcycle helmets
You still have to record zero-rated transactions in your VAT accounts and report them on your VAT Return.
Rates can change and you must apply any changes to the rates from the date they change.
3. What you must do when charging VAT
You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases.
If a transaction is a standard, reduced or zero-rated taxable supply, you must:
- charge the right rate of VAT
- show the VAT information on your invoice
- show the transaction in your VAT account - a summary of your VAT
- show the amount on your VAT Return
You may be able to reclaim the VAT on purchases that relate to these sales.
You can't claim back all of the amount you've paid if you pay the wrong amount of VAT on a purchase.
4. When not to charge VAT
You can’t charge VAT on exempt or ‘out of scope’ items.
Exempt
Exempt goods or services are supplies that you:
- can’t charge VAT on
- must not include in your VAT records
If you buy or sell an exempt item you should still record the transaction in your general business accounts. Examples of exempt items include:
- insurance
- postage stamps or services
- health services provided by doctors
Get a list of goods and services that are VAT exempt.
Out of scope
Some goods and services are outside the VAT tax system so you can’t charge or reclaim the VAT on them. For example, out of scope items include:
- goods or services you buy outside of the EU
- statutory fees - like the congestion charge or MOT testing
- goods you sell as part of a hobby - like stamps from a collection
- donations to a charity - if given without receiving anything in return
5. Discounts and free gifts
Discounts
VAT may have to be charged on discounts and deals.
| Offer | How to charge VAT |
|---|---|
| Discounts | Charged on the discounted price (not the full price) |
| Gifts | Charged on the gift's full value - there are some exceptions listed below |
| Multi-buys | Charged on the combined price if all the items have the same VAT rate. If not, VAT is 'apportioned' as mixed-rate goods |
| Money-off coupons, vouchers etc | No VAT due if given away free at time of a purchase. If not, VAT due on the price charged |
| Face value vouchers (used instead of money for purchases) | No VAT due, if sold at or below their monetary value |
| Redeemed face value vouchers | Charged on the full value of the transaction |
| Redeemed face value vouchers sold at a discount | Charged on the discounted value of the transaction |
| Link-save offers (buy one get one free or discounted) | VAT is apportioned as mixed-rate goods - there are exceptions |
Exceptions for gifts and link-save offers
There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.
VAT is charged on the combined value of link-save items if the incentive product:
- has a resale value of less than £1
- has a sale value of less than £5
- costs you less than 20% of the total of the other items in the offer
- isn’t sold at a separate price from the main product
Free goods and services
You don’t have to pay VAT on things like free samples if they meet certain conditions.
| Supplies | Condition to meet so no VAT due |
|---|---|
| Free samples | Used for marketing purposes and provided in a quantity that lets potential customers test the product |
| Free loans of business assets | The cost of hiring the asset is included in something else you sell to the customer |
| Free gifts | The total cost of all gifts to the same person is less than £50 in a 12 month period |
| Free services | You don’t get any payment or goods or services in return |