VAT is a tax on transactions and, as such, is likely to impact your business day-to-day. Compliance with the ever-changing VAT regulations is therefore vital for all businesses, while ensuring optimal cashflow and profitability.
International trade: Here’s what you need to know guide
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We work with a wide range of corporates on VAT matters and we:
- Advise some of the largest property companies and urban estates in the UK
- Provide strategic advice to FTSE 100 multi-national companies on supply chain optimisation
- Advise across the fintech and insurtech sectors in respect of maximising VAT recovery in the UK and efficient global expansion structures
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Frequently asked questions about VAT
Do I need to register for VAT?
You will need to register for VAT if you make taxable supplies exceeding the VAT registration threshold.
Businesses that make taxable supplies, that is, supplies that are subject to VAT, need to monitor the value of these supplies to determine whether or not they exceed the VAT registration threshold. The current VAT registration threshold (2022/23) is £85,000.
If taxable turnover exceeds or is expected to exceed the VAT registration threshold either:
- In a historic 12 month period (assessed at the end of each month)
- In a future 30 day period (assessed daily)
Then the business will need to register for VAT and will have 30 days to do so.
It should be noted that businesses established outside of the UK in the EU have a VAT registration threshold of £0.
If your business makes taxable supplies that are below the VAT registration threshold you may also register for VAT voluntarily, which may give you the opportunity to recover VAT on your costs.
Do I need to charge VAT?
You will need to charge and collect VAT if the type of supplies you make are taxable at the standard or reduced rate of VAT and your business is VAT registered.
Supplies made in the course of business can have one of the following VAT liabilities:
- Standard rated (20%)
- Reduced rated (5%)
- Zero rated (0%)
- VAT exempt (VAT not chargeable)
- Outside the scope of VAT (VAT not applicable)
If your business is VAT registered and makes supplies subject to VAT at the standard rate or reduced rate of VAT, VAT should be charged accordingly.
Most supplies are subject to VAT at the standard rate but there are some common exceptions (this list is not exhaustive):
- Certain financial services are VAT exempt
- Certain real estate related services are VAT exempt
- Most food items are zero rated
- Certain education and healthcare services are VAT exempt
- Exports of goods to outside the EU may be zero rated
- Supplies made for no consideration at outside the scope of VAT
- Children’s clothing is zero rated
- Domestic energy is reduced rated
Ensuring the correct VAT liability is applied to sales is imperative in ensuring compliance with the legislation.
Can I recover VAT on my costs?
You may be able to recover VAT on costs. This will depend on the types of supplies you make.
A VAT registered business can recover VAT on its costs if it makes taxable supplies or supplies that are outside the scope of VAT that give rise to VAT recovery. However, VAT cannot be recovered in relation to any VAT exempt or non-business activities.
If a business only makes taxable supplies, that is, standard, reduced or zero rated supplies, then it should normally be able to recover VAT in full. If a business only makes exempt supplies it would normally not benefit from any VAT recovery. If a business makes both taxable and exempt supplies, it will recover a proportion of the VAT it incurs by applying a partial exemption method. Partial Exemption is a complex area of VAT legislation and it is likely there may be several options available to businesses in this position. The Evelyn Partners VAT team has extensive experience in agreeing Partial Exemption Special Methods (PESM) with HMRC and we are happy to assist your business in improving your VAT recovery position.
VAT on some costs is always irrecoverable, for example VAT incurred on business entertainment.
A valid VAT invoice must be held to support any VAT recovery.
What is the reverse charge?
The reverse charge is an obligation to self-account for VAT on certain supplies received.
The reverse charge is a mechanism under which the recipient of a supply accounts for output VAT on the supply instead of the supplier. The supply is treated as being made by and received by the customer.
The recipient of the supply will need to calculate the VAT due and report this in Box 1 of their VAT return. The rate of VAT to be applied will depend on the nature of the supplies received.
The recipient can recover this VAT as input VAT in Box 4 of their VAT return subject to the normal rules. For example, if the recipient is partially exempt, they may not be able to recover the VAT in full.
The reverse charge applies to the following supplies (this list is not exhaustive):
- Services received from non-UK suppliers
- Certain goods received from UK suppliers including mobile phones and computer chips
- Certain services received from UK suppliers, including wholesale telecoms and emissions allowances
What is a VAT invoice?
An invoice is required to contain specific information in order to valid for VAT purposes.
A VAT registered business is required to issue a valid VAT invoice to its VAT registered customers for any supplies it makes that are subject to VAT.
In order to be valid VAT invoice, the document must contain the following:
- Customer name and address
- Supplier name and address
- Supplier VAT number
- Unique, sequential invoice reference number
- Invoice date and tax point date (if different)
- Description of the goods/services being supplied
- Quantity of each item provided (goods only)
- Net amount per item excluding VAT
- Total net amount excluding VAT
- Total amount of VAT in GBP
- Rate of VAT charged per item
- Rate of any discount per item
- Total amount including VAT (gross)
VAT invoices should be raised within 30 days of the time of supply.
The recipient of a supply cannot recover the VAT it is charged without being in possession of a valid VAT invoice.
How do I respond to an HMRC VAT audit?
A proactive and open approach to HMRC VAT audits will help provide HMRC with confidence and put you in the best position in respect of potential penalties if any errors are discovered.
HMRC VAT audits can be routine check-ups or can be triggered by a large repayment claim or error disclosure. VAT audits can be a long and burdensome process, particularly if the wrong information is provided at the outset or HMRC discover errors.
It is critical that HMRC fully understands your business and the supplies it makes at the outset to avoid any misunderstanding throughout the audit process. In particular, details of any supplies not subject to VAT or subject to the reduced or zero rate and details of any VAT schemes used should be explained.
HMRC will also typically provide a list of documents it would like to review. If possible, this should be reviewed by the business ahead of the audit and any issues noted highlighted to HMRC at the outset. Any penalties for inaccuracies can be mitigated if the business takes a proactive and open approach to the audit.
What is Making Tax Digital for VAT (MTDfV)?
Making Tax Digital for VAT (MTDfV) is a requirement that impacts the preparation and submission of VAT returns. It is HMRC’s strategy to modernise the tax system and requires businesses to prepare and file their VAT returns digitally.