VAT FAQ

Getting added value from your VAT

Can I claim back VAT on goods and services?

Once you are registered for value added tax (VAT), you are entitled to claim back the VAT you pay on goods and services bought in the course of normal business activity (called input tax). The main categories of goods and services for which you can claim back VAT are:

Purchases for resale

If you use goods or services for both business and private purposes, such as your telephone, you cannot recover VAT on the whole amount of these expenses, but only on the amount related to the business use.

A business cannot reclaim VAT on ‘ business entertainment ’ expenses.

HM Customs & Excise operates simplified VAT accounting schemes for small businesses, called ‘cash accounting’, ‘annual accounting’ and the ‘flat rate scheme’. ‘Cash accounting’ means a business only pays VAT when customers pay, but does mean VAT is only recoverable when its suppliers are paid. ‘Annual accounting’ reduces the number of VAT returns a business needs to complete from four to one a year. The ‘flat rate scheme’ involves paying a set percentage on turnover, determined by the type of business – this means there is no input tax to account for (although a business can reclaim VAT on capital items over �2000).

An Electronic VAT Return service is also available from HM Customs & Excise.

What are exempt supplies?

Exempt supplies are goods and services that are produced or traded in the course of your business activity to which no value added tax (VAT) applies. See HM Customs & Excise Notice 700: VAT Guide: Zero-Rating and Exemption

The main business activities that are exempt from VAT are the sale and letting of land, financial and insurance services, postal services, education, sport and burial and cremation services.

You can check the liability of your supplies in HM Customs & Excise Office Notice 701/39: VAT liability law or ask for advice at your local VAT business advice centre.

Relevant Online Forms

Forms are available from HM Customs & Excise.

When is my business exempt from registering for VAT?

You are exempt from the normal registration requirements for value added tax (VAT) if you make only zero-rated supplies. You must normally register for VAT when the value of your taxable supplies - generally speaking, the goods or services you sell - which include zero-rated goods, exceeds �60,000. You can also get exemption from registration when you make taxable supplies in addition to zero-rated supplies, but the level of the taxable supplies must fall below �60,000. In both cases, not registering for VAT means that you cannot reclaim the VAT that you pay on your purchases. For further information, please see HM Customs & Excise Notice 700: VAT Guide: Zero-Rating and Exemption.

Certain goods and services are classed as exempt from VAT; if you supply only these, you do not have to register for VAT.

Relevant Online Forms

Forms are available from HM Customs & Excise.

What goods and services are zero-rated for VAT?

Zero-rated supplies are taxable supplies charged at zero rate and goods and services that you do not, therefore, have to charge value added tax (VAT) on. The general categories of zero-rated goods and services are food, sewerage and water services, books, construction of buildings, international services, transport, caravans and houseboats, gold, bank notes, drugs, medicines, imports and exports, tax-free shops, charities, clothing and footwear. However, there are exceptions within these general categories. For example, food supplied in the course of catering is charged at the standard rate. You can check the liability of the supplies you make at HM Customs & Excise Office Notice 701/39: VAT liability law or at your local VAT advice centre.

Relevant Online Forms

Forms are available from HM Customs & Excise.

Can VAT invoices, records and returns be stored and sent electronically?

A business is not obliged to keep VAT invoices and records in any particular format, but they must be kept in one that means they can be readily available to VAT inspectors in a legible form. Records must be kept of all taxable goods and services received and supplied in the course of a business.

HM Customs & Excise has rights of access to VAT-related records on a computer and can check its operation and the information stored – in doing this, they can ask for help from people in a business who are in charge of or who operate the computer or its software. If a business employs a computer bureau, the business is responsible for arranging for the bureau to make records available to HM Customs & Excise.

HM Customs & Excise suggests that on first registering for VAT a business should notify the local VAT Business Centre if it intends to use a computer or the services of a computer bureau for VAT accounting.

Businesses can also complete VAT returns online using the ‘eVAT’ service (there is no need to complete paper forms). To use the service, a business must first register on the HM Customs & Excise website. By paying by an approved electronic method a business may get additional time to make returns and payments

What special VAT accounting arrangements are there for small businesses?

HM Customs & Excise operates simplified VAT accounting schemes for small businesses, called ‘cash accounting’, ‘annual accounting’ and the ‘flat rate scheme’.

‘Cash accounting’ means a business only pays VAT when customers pay, but does mean VAT is only recoverable when its suppliers are paid. A business can choose this scheme if its annual turnover subject to VAT is less than �660,000 (there are other conditions, mainly based on previous compliance with VAT regulations).

‘Annual accounting’ reduces the number of VAT returns a business needs to complete from four to one a year. The scheme is open to businesses with an annual turnover not expected to exceed �150,000 (meaning they can join on initially registering for VAT), and to businesses with an annual turnover not expected to exceed �660,000 and already registered for VAT for at least 12 months.

The ‘flat rate scheme’ involves paying a set percentage on turnover, determined by the type of business (that is, the kind of goods or services being traded) – this means there is no input tax to account for (although a business can reclaim VAT on capital items over �2,000). Businesses with taxable turnover of �150,000 or less and total turnover of �187,500 or less (both excluding VAT) can apply to use the scheme.

There is no need for a business to formally apply to use ‘cash accounting’; but the other schemes require application to a VAT Registration Unit.