UK Fact-File Part 2:
Individual Business Domestic Taxation
2.10 UK Value Added Tax (VAT)
VAT is charged on most goods and services.
VAT can only be charged or reclaimed by a VAT-registered business
or individual. VAT is charged on certain goods or services
sold (output tax) and can be claimed back on VAT paid on goods
or services purchased (input tax).
Updated in December 2010
The standard rate of VAT increases to
20% on 4th January 2010; prior to that it was 17.5%. A reduced
rate of 5% applies inter alia to domestic fuel or
power, heating equipment, children’s car seats, some contraceptives
and sanitary products, and certain residential property renovations.
Included in the list of supplies that are zero-rated are
gold and UK bank notes, books, children’s clothing, charities,
food, drugs & medicines, transport and sewage, water services,
goods supplies to other VAT-registered entities within the
EU, and certain transactions related to the construction of
residential property.
Certain goods and services are exempt from VAT or may fall
outside the scope of the UK VAT system. Items exempt from
VAT altogether include insurance, credit services, education
& training and the services of a doctor or dentist. Selling
or leasing commercial property is exempt from VAT, though
a business can opt to relinquish the exempt status that would
allow VAT payable (input tax) to be reclaimed.
A business or sole trader must register for VAT if the goods
or services provided are classed as taxable supplies in the
UK, provided annual turnover exceeds GBP70,000 (increased
from GBP68,000 prior to April 2010) or is expected to exceed
this threshold. In a partnership, one partner should be nominated
to execute the VAT returns.
Non-resident businesses or individuals with operations in
the UK are still required to register if they meet any of
the criteria for registration, subject to the threshold stated
above. Non-resident businesses or individuals who have no
place of business in the UK, but are nevertheless eligible
for VAT registration by merit of: supplying VAT-liable goods
or services in, to, or from the UK, assuming control of a
VAT-registered business, or receiving VAT liable goods from
another EU country (all subject to the GBP70,000 threshold),
must register as a Non-Established Taxable Person (NETP).
Where a business is engaged in distance selling to customers
in the UK (ie the sale of services or goods over the Internet
or by mail order) and the business is based in another EU
country and is registered for VAT in that country, then the
business must register for UK VAT if the value of sales exceeds
GBP70,000 per year. If alcohol and tobacco, or other excise
duty goods, are sold by distance selling methods then VAT
registration is compulsory regardless of turnover.
It is currently not possible to register online if non-UK
resident.
VAT returns must usually be completed every three months.
The VAT Return must detail the amount of VAT charged on sales
(output) and the amount paid on purchases (input). VAT returns
have, in recent years, been filed in paper or online, but
by mid-2010 it is planned that all returns will have to be
filed online and the VAT due paid electronically.
VAT returns are normally due one month after the end of the
VAT accounting period. HMRC will specify on which quarterly
dates a return is due. Returns filed online must be paid electronically.
If VAT is due to be paid, HMRC will allow a further seven
days for payment to be made.
If payment of VAT is late a surcharge will be levied by HMRC
– usually 2% of the amount of unpaid VAT. Penalties will increase
for continued late payment.
The EU VAT directives
As the UK is a member of the European Union, it is subject
to European VAT legislation, as defined under the Sixth VAT
Directive (2006/112/EC), and therefore, VAT-registered independents
operating from the UK will be subject to the VAT directive,
to the degree that the UK authorities are bound by it in putting
in place standard and reduced rates within the permitted range,
and setting the national rules regarding when and how VAT
should be charged by registered businesses and individuals.
In addition, independents undertaking imports in excess (from
January 2010) of GBP600,000 per year, or exporting more than
GBP250,000 in taxable goods (but not services, as they are
excluded) will be obliged to make declarations for Intrastat
purposes. Intrastat has been put in place to collect data
on trade in goods between EU member states.
Under new rules coming into force between 2010 and 2015 (with
changes relating to telecoms, broadcasting and electronic
services delayed until January 1, 2015), business to business
(B2B) supplies of services will be subject to VAT in the country
in which the consumer is located, rather than the supplier’s
country of residence, with the business consumer required
to account for VAT using the reverse charge mechanism (whereby
they act as both the supplier and the consumer, charging themselves
the VAT where appropriate, and then claiming it back).
For business to private consumer (B2C) supplies of services,
the place of taxation with regard to VAT will remain as the
supplier’s location.
There will, however, be certain exceptions, where the general
rules do not apply, and specific rules will be in place, to
reflect that the place of taxation should be where the service
is consumed. Exempted areas will include: the electronic supply
of services, telecommunications and broadcasting, certain
catering and hospitality services, scientific and educational
supplies, and cultural and sporting services and supplies.
The new rules have effectively removed the advantage of locating
in an EU jurisdiction with a low VAT rate, such as Luxembourg
or Madeira.
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