VAT rates and exemptions – What do you need to know?
Posted on 26th April 2023
Value Added Tax (VAT) is a tax that is charged on most goods and services in the UK.
It is a consumption tax, which means that it is charged on the value added at each stage of production or distribution.
VAT is an important source of revenue for the Government, and businesses are required to register for VAT if their annual taxable turnover exceeds a certain threshold.
If your VAT taxable turnover exceeds £85,000 over a 12-month period, then you will need to register for VAT and begin charging it on your products.
If your business does not exceed this amount, you are not required to register for VAT but can do so voluntarily.
There are several VAT rates and exemptions that businesses need to be aware of.
The standard VAT rate is currently 20 per cent, and this is the rate that applies to most goods and services.
However, there are also reduced rates of 5 per cent and 0 per cent, as well as exemptions and zero-rated supplies.
The reduced VAT rate of 5 per cent applies to certain goods and services, such as domestic fuel and power, children's car seats, and sanitary products.
This rate is designed to make these essential items more affordable for consumers.
Certain goods and services are zero-rated for VAT purposes.
This means that they are still subject to VAT, but the rate is 0 per cent.
Examples of zero-rated goods and services include most food items, books and newspapers, and children's clothing and footwear.
Exempt supplies are those that are not subject to VAT at all.
This means that businesses cannot reclaim the VAT they have paid on goods and services related to these supplies.
Examples of exempt supplies include education and training, insurance, and certain types of medical care.
It is important for businesses to understand the different VAT rates and exemptions, as it can affect their VAT liability and cash flow.
Businesses that sell goods or services that are exempt or zero-rated do not charge VAT on those sales, but they may still be able to reclaim the VAT they have paid on related costs.
Conversely, businesses that sell goods or services that are subject to the standard rate of VAT must charge VAT on those sales and pay it to HM Revenue and Customs.
By being aware of the different rates and exemptions, businesses can ensure that they are compliant with VAT regulations and can manage their VAT liability effectively.
If in doubt, it is always best to seek professional advice from a VAT specialist or accountant.
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