Value-added tax (VAT)
Who pays VAT? Businesses with a turnover of more than £85,000 must register to pay and charge VAT on the products and services they buy and sell.
Other businesses can choose to register for VAT voluntarily.
Businesses charge their customers VAT, but must then pay this to HMRC when they file their VAT return.
The standard VAT rate of 20% applies to most goods and services, apart from domestic fuel and power and certain other reduced-rate supplies, which are subject to VAT at 5%.
Certain small traders (supplies less than GBP 150,000 per annum) with a limited range of expenses may adopt a special flat-rate scheme, which computes VAT at a sector-specific flat rate.
Most exports, most food, most public transport, most books and publications (including, from 1 May 2020, e-publications), and certain essential goods and services are zero-rated. Some supplies are exempt, the main categories being the grant of certain interests in land, insurance, financial services, betting and gaming, education, certain sports services, cultural services, and health and welfare. Zero-rating is preferable to exemption because the VAT on costs incurred in making a zero-rated supply can be recovered while that incurred in making an exempt supply cannot.
VAT is chargeable on the supply of most goods and services made in the United Kingdom by ’taxable persons’ in the course of business, when their taxable turnover exceeds the registration thresholds. Taxable persons include individuals, companies, partnerships, clubs, associations, or charities.
Taxable persons who are not normally resident in the United Kingdom, do not have a business establishment in the United Kingdom, and, in the case of companies, are not incorporated in the United Kingdom, but who make taxable supplies, sales to unregistered persons in the United Kingdom, or acquisitions of goods in the United Kingdom above the relevant limits, may be required to register and account for VAT in the United Kingdom.
If the value of taxable supplies is over a specified limit, registration for VAT is compulsory unless the taxable supplies made are wholly or mainly zero-rated, in which case it is possible to apply for exemption from registration. A zero VAT registration threshold applies for businesses not established in the United Kingdom.
The rules applying to VAT and territoriality are different to those applying to direct tax in that they derive from the principles of the place of supply in EU law, as enshrined in European Commission (EC) VAT Directives. Having determined that a supply of goods or services has taken place, the second condition to be determined, if the transaction is to fall within the scope of UK VAT, is whether the supply takes place within the United Kingdom. The place of supply rules are different for goods and for services. A person or business belonging outside the United Kingdom, with no place of business in the United Kingdom, may, nevertheless, be liable to UK VAT registration where the place of supply of those goods or services is in the United Kingdom.
For goods, the basic rule is that a supply of goods is taxable in the territory where those goods are physically located at the time of supply. Hence, if goods are supplied in the United Kingdom by a non-established taxable person, there will still be a liability for VAT purposes, and the person must register for VAT in the United Kingdom if the taxable supplies exceed the current UK VAT registration thresholds. A zero VAT registration threshold applies for businesses not established in the United Kingdom.
For services, the basic rule is that services are treated as made where the customer ’belongs’ or is established for VAT purposes, and the customer is responsible for accounting for the VAT due via the reverse-charge procedure. However, this is subject to a number of special rules and exceptions. Determining where a business is established for VAT purposes is based on EU law criteria.
For business-to-consumer (B2C) supplies, the basic rule is that services are treated as made where the supplier ’belongs’ or is established for VAT purposes. B2C supplies of telecommunications, broadcasting, and electronic services are taxed where the customer is located or is normally resident.
VAT returns and payments
VAT returns must be completed at pre-set intervals (usually every three months). Larger companies may be required to file monthly returns or make monthly payments on account. All businesses are required to file VAT returns online and make electronic payments. Smaller enterprises can apply for annual returns. VAT returns are usually required to be filed 30 days after the end of the period.
With effect from 1 April 2019, businesses with taxable turnover above the UK VAT registration threshold are required to keep and preserve digital records and provide VAT returns using compatible software. This is done via an ‘application programming interface’ (API), which enables taxpayers to communicate electronically with HMRC.
Annual accounting is available for taxable persons with annual turnover (taxable supplies, excluding VAT) not exceeding GBP 1,350,000.
Cash accounting is available for taxable persons with annual turnover (taxable supplies, excluding VAT) not exceeding GBP 1,350,000.
In addition, a flat rate scheme operates for small businesses and is intended to simplify VAT accounting procedures.
Digital Services Tax (DST)
Pending international agreement on how to address the tax challenges of the digitalisation of the economy, in particular the OECD’s two-pillar approach, the UK has introduced a Digital Services Tax (DST) as an interim measure to address these tax challenges. From April 2020, this new DST applies at a rate of 2% to the revenues of certain digital businesses to reflect the value they derive from the participation of UK users, pending an appropriate international solution.
The tax applies to annual ‘UK’ revenues above 25 million pound sterling (GBP) from activities relating to Internet search engines, social media platforms, and online marketplaces (of businesses with in-scope annual global revenues of more than GBP 500 million). Loss-makers are exempt, and businesses with very low profit margins are subject to a reduced effective rate. The intention is that this will be disapplied once the OECD’s appropriate global solution is in place.
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