What is VAT?
Indirect tax on consumer spending, charged on most goods and services supplied within the UK, borne by the final customer, collected by businesses on behalf of HMRC. |
VAT Rates
VAT Type |
VAT Rate |
Standard |
20 % |
Reduced |
5 % |
Zero |
0 % |
Exempt |
- |
Reduced and Zero Rate Supplies
VAT Rates in the UK |
Standard Rate |
20% |
(20/120 of gross price). |
Reduced Rate |
5% |
Applies to domestic/charity fuel/power, children’s car seats, and certain residential improvements. |
Zero Rate |
0% |
Covers basic food (excl. luxury/catering), water/sewerage, books/newspapers, children’s clothing/footwear, and protective boots/helmets. |
Calculating VAT (including Discounts)
VAT is calculated as a percentage of the net price (before VAT). |
Own Use/Gifts: |
VAT based on recipient's price for identical item. |
Temporary Use |
VAT calculated on depreciation value during the usage period. |
Supplies to Connected Persons Below Market Value: |
VAT is based on market value, not the reduced price. |
|
|
Basic Tax Principle
Tax should be charged at each stage of production and distribution, but borne by the final customer of the product. |
VAT Supplies
Supply of Goods (VAT Purposes) |
Requires ownership transfer + consideration. Includes business asset gifts (excl. samples/£50 gifts) and private use of goods. |
| |
Supplies of Services |
Non-goods supply for consideration. Includes hiring goods, business use of reclaimed input tax goods/services. Excludes gift services and private car use. |
| |
Self Supply |
Taxable person supplies goods/services to themselves (e.g., manufacturer using own product). Input tax not reclaimable. |
The Effects of Discounts
VAT is calculated on the actual amount paid after discounts. If a discount is applied at the time of payment, VAT is reduced accordingly, ensuring it is only paid on the discounted price. |
Legal Requirements
VAT Record-Keeping |
All VAT records must be retained for 6 years (electronic or physical). Required records include: |
• Business/accounting records. |
• VAT account. |
• Copies of tax invoices issued/received . |
• Import/export documents. |
|
|
What tax is paid to the government?
Net input and output tax is paid to the government (HMRC). |
| |
Gross Amount = |
Net Amount + VAT |
| |
• *'Gross' amount is the value of the invoice including VAT.* |
| |
• *'Net' amount is the value of the invoice before adding VAT. |
Exempt Supplies (not in VAT)
VAT-free goods/services include: |
Building sales/leases (excl. new), insurance, financial services, Royal Mail, betting, health, burial, non-profit sports, charity fundraising, education, cultural services, unrecoverable input VAT supplies, investment gold, and cost-sharing services. |
VAT on Bad Debt
VAT on Bad Debts |
• Cash Accounting: VAT recorded on payment. |
| |
• Accrual Accounting: VAT recorded before payment; risk if unpaid. |
| |
Claim VAT if: |
• VAT paid to HMRC. |
| |
• Debt written off. |
| |
• 6 months overdue. |
| |
• Claim within 4 years, 6 months. |
If unpaid to the supplier within 6 months, repay input VAT to HMRC. |
|
Created By
Metadata
Comments
No comments yet. Add yours below!
Add a Comment
Related Cheat Sheets
More Cheat Sheets by mgrawahi