Scope and Rates
Value-added tax (VAT) is due on any supply of goods or services made in the United Kingdom (UK), where it is a taxable supply made by a taxable person in the course or furtherance of a business carried on by said person. Supply includes all forms of supply. It is not restricted to the provision of goods and services by way of sale but can apply equally to other forms of transaction, including the leasing or hire of goods, the grant, assignment, or surrender of a right, or even an agreement not to do something.
Supply does not include anything done otherwise than for a consideration. However, certain actions carried out for no consideration are deemed to be supplies; for example, giving business gifts and samples, and private use of business assets.
The standard rate of VAT is currently 20 percent. This was increased from 17.5 percent on 4 January 2011. The rate was temporarily reduced to 15 percent from 1 December 2008 to 31 December 2009.
Yes. There is a reduced rate of 5 percent for certain goods and services, including:
- domestic fuel and power
- energy saving materials (currently subject to infringement procedures)
- residential renovations and alterations
- residential conversions
- children’s car seats
- contraceptive products
- installation of mobility aids for the elderly
- smoking cessation products
- welfare advice or information
- women’s sanitary products
- grant-funded installation or connection of heating equipment, security goods and gas supplies.
There is an extensive list of zero-rate supplies, including:
- sewerage services and water
- books and talking books for the blind
- constructions of buildings (generally residential and charitable use)
- international services
- bank notes
- drugs, medicines, and aids for the handicapped
- clothing and footwear (generally children's)certain supplies by charities.
The list of exemptions includes:
- land (Certain transactions are automatically standard rated such as some freehold commercial property sales. There is an option to tax other commercial land transactions.)
- postal services
- betting, gaming, and lotteries
- health and welfare
- burial and cremation
- subscriptions to Trade Unions, professional and other public interest bodies
- Sports, sports competitions and physical education
- works of Art
- fund raising events by charities and other qualifying bodies
- cultural services.
Note: it is not possible to recover VAT incurred in making exempt supplies.
- Insurance Premium Tax
- Customs Duty
- Excise Duty
- Landfill tax
- Climate Change Levy
- Stamp Duty and Land Tax
- Air Passenger Duty
- Machine Games Duty (from February 2013).
Businesses making taxable supplies in the UK over the VAT registration threshold (GBP 77,000 as of 1 April 2012) are required to register and account for UK VAT. If they trade below the registration threshold they can still choose to register for VAT as a Voluntary Trader.
If a business makes only/predominantly zero-rated supplies and these supplies exceed the VAT registration threshold, then it may apply for exemption from VAT registration. It is necessary to demonstrate that where some standard rated supplies are made, the output tax due on these supplies is less than the input tax which is recoverable.
If the business has an establishment in the UK and makes supplies outside the UK which would be taxable if made in the UK, then it may elect to register for UK VAT.
Until 30 November the registration rules that apply to UK entities also apply to non-UK entities which are making taxable supplies in the United Kingdom. From 1 December 2012 the threshold for non UK entities will be removed. However if supplies are or would be zero rated the tax authorities may exempt that non UK entity from registration. If your business is not registered for VAT in the UK but sells and delivers goods from another member state to customers in the UK who are not VAT registered (distance sales), where the value of those sales exceeds a threshold of GBP 70,000, your business is required to register and account for VAT in the UK.
If a business is established outside the EU and supplies electronically supplied services to customers in the UK who are not VAT registered, then the place of supply is in principle the UK. The company will then have to register for UK VAT. If, however, it supplies the same services to customers in other EU Member States it can opt to register for VAT in one Member State rather than all of them. In this case, it still has to account for VAT on its supplies at the rate prevailing in the country of the customer but it only has to deal with one member state for filing and payment purposes.
Form VAT 1 Application for Registration' can be accessed on the HMRC’s website.
There is a failure to notify penalty where the business exceeds the VAT registration limit and fails to inform the tax authorities within 30 days. The penalty is a percentage of the VAT due as a result of the failure. The percentage depends a number of factors including the reason for the failure to notify and the how the failure was disclosed. The table below outlines the percentages.
||0 percent within 12 months, then 10 percent
||10 percent within 12 months, then 20 percent
|Deliberate and concealed
Yes. Until 30 November 2012 a non established overseas business making supplies in the UK below the registration limit (which is GBP 77,000 a year as at 1 April 2012) can register voluntarily in the same way as a UK company. Registration means UK VAT must be accounted for on all taxable sales made in the UK, including those where the customer would be liable under the reverse charge rules if the overseas business was not UK VAT registered. From 1 December 2012 such companies will be required to register (see above).
An overseas business with a UK fixed establishment that makes no taxable supplies in the UK but makes supplies abroad that would be taxable in the UK can voluntarily register. Registration allows input tax to be claimed through the VAT return system.
An overseas business with no establishment in the UK can only register if it is making supplies in the UK. It is important to note that where services are to business customers, the tax authorities will consider the VAT to be accounted for by the recipients under the reverse charge mechanism.
If a business makes supplies of goods or services in the UK in excess of the VAT registration threshold, then you are required to register and account for UK VAT. However, it is possible to avoid registering and accounting for UK VAT when making certain supplies.
If the only taxable supplies in the United Kingdom in excess of the registration limit are imported goods, a UK agent may register for UK VAT on the overseas company’s behalf and recover the import VAT, accounting for UK VAT on the onward sale in the United Kingdom.
The sale of capital items is not included in the calculation of turnover for UK VAT registration purposes.
In the following examples the obligation to account for the VAT due can be shifted to your customer provided that your customer is registered for UK VAT.
If a business is an intermediate supplier to a UK buyer of goods which it purchases from a business in another EU Member State and are delivered from there to the United Kingdom, VAT due can be accounted for by the UK customer (see Invoices).
Where an EU VAT registered seller stores stock which is sourced from an EU Member State, at a UK customer's premises and under the customer's control, the customer accounts for VAT on the supply as an acquisition.
Supply and Install
If a business supplies goods and installs or assembles them in the United Kingdom, its customer can account for any VAT due, in effect, as an acquisition. It must be registered for VAT in another EU Member State, and not otherwise required to be registered in the United Kingdom. In addition, the goods must be shipped from within the EU (see Invoices).
Reverse charge services are covered in more detail under International Supplies of Goods and Services. These provisions are subject to particular requirements and so businesses should check carefully whether they comply with them.
The appointment of a fiscal representative in the UK is not mandatory unless HMRC direct. An overseas business can choose between the following options when registering for VAT in the UK:
Appointment of a VAT Representative
The business may appoint a VAT representative who will be jointly and severally liable for any VAT debts. It is understood that, in practice, very few businesses are prepared to provide the services of a VAT representative because of the joint and several liability issue.
HMRC can direct that a person/company who/which does not have an establishment in the United Kingdom must appoint a VAT representative. This would apply where HMRC consider there is a risk that they will not receive the assistance they require from the overseas company’s country to control the UK registration. This is only likely to be an issue where the overseas company is non-EU.
Appointment of an Agent
A business may appoint an agent to deal with the VAT affairs. The agent cannot be held responsible to HMRC for any VAT debts and HMRC reserve the right not to deal with any particular agent. The overseas trader must still complete a VAT registration form. In addition, HMRC will need a letter of authority, advising of the agent’s capacity to deal with the company’s VAT affairs.
Direct Relationship with HMRC
A business may deal with all its relevant VAT obligations (including registration, returns and record keeping) personally. To register, the overseas trader should contact the Aberdeen VAT Office at:
Ruby House 8 Ruby Place
Tel. +44(0)1224 404807/404818
Yes, provided various criteria are met. Primarily there must be an element of common control over the members of the group. Essentially common control means that one of the VAT group members controls the others or they are all controlled by the same person. Common control is exercised in a variety of ways, the most common of which is by holding a majority of voting rights.
The tax authorities have the discretion to refuse a group registration or to terminate a person’s membership of a group registration for the protection of the revenue.
The UK is one of many countries being infracted by the Commission for the inclusion of non taxable persons in VAT Groups.
Yes, provided the company has an establishment in the United Kingdom. Generally, an establishment requires human and technical resources to be present.
Access the forms VAT 50 Application for VAT Group Treatment and VAT 51 Application for VAT Group Treatment - Company Details on the HMRC’s web site.
Most registered businesses are required to submit VAT returns on a quarterly basis. However, if their annual tax liability exceeds GBP 2 million then it will also be required to make interim monthly payments on account on the two other months (alternatively it can opt to submit monthly VAT returns).
If a business is in a repayment position because its input tax exceeds its output tax, it can opt to submit monthly VAT returns which will ease its cash flow.
Failure to furnish VAT returns and settle any outstanding VAT payments on time may result in a default surcharge. For example, two late VAT payments or VAT returns in a 12-month period will give rise to a 2 percent penalty of the tax due on the second return. The penalty increases firstly to five percent, then to 10 percent up to a maximum 15 percent for each further late return or payment. A business will remain within the default surcharge regime until there has been a 12-month period free of defaults. To mitigate default surcharges a business must show a reasonable excuse for the default.
European Sales List (ESL)
Businesses are required to submit ESLS for goods and services.
Goods – if a business supplies goods which are shipped from the United Kingdom to VAT registered businesses in other EU Member States and wishes to zero-rate the supply (see International Supplies of Goods and Services), it is required to complete ESLs.
Services – since 1 January 2010 business are also required to submit lists for services provided to other EU Member States where the recipient is liable to account for the VAT under Article 196.
Frequency of returns
Goods – ESLs are on a monthly basis. Where the quarterly value is less than EUR 35,000 returns can be submitted quarterly
Services - ESLs can be completed on a calendar quarter basis.
Failure to submit ESLs on time will result in the tax authorities issuing a notice stating that the business is in default and, unless the default is remedied within 14 days of the notice, will become liable to a penalty, which is the greater of GBP 50 or GBP 5 for each day the default continues after the 14 day period, up to a maximum of 100 days. The notice may also state that the business will become liable, without further notice, to penalties if there are any more defaults before a period of 12 months has elapsed without the business being in default. In these cases the penalty is the greater of GBP 50 or GBP 5 per day for the first subsequent default rising to GBP 15 per day for the third or further subsequent defaults, up to a maximum of 100 days. A business will remain within the default regime until there has been a 12-month period free of defaults.
Material inaccuracies in ESLs may also lead to penalties of GBP 100 per statement, if the business has been the subject of a notice from the tax authorities stating that such inaccuracies will attract a penalty. For the tax authorities to issue such a notice in the first place the business must already have submitted two ESLs containing material inaccuracies within a certain period of time.
Intrastat Supplementary Declarations
VAT registered businesses with a value of dispatches or arrivals to or from other EU Member States, which exceed a certain threshold must complete supplementary declarations each month. The Threshold for arrivals is currently GBP 600,000 and GBP 250,000 for dispatches.
The Intrastat Penalty regime is a criminal one and could result in proceedings in a Magistrates Court, although HMRC normally prefer to compound any proceedings. This involves the offer of an administrative fine in lieu of any Court proceedings.
Access the form VAT 101 EC Sales List - Fully Printed Version on the HM Revenue and Customs web site.
Businesses must use the UK market selling rate at the time of the supply. The rates published in national newspapers are accepted as evidence of the rates at the relevant time. There are alternative options:
- businesses may use the period rate of exchange published by HMRC for customs purposes
- businesses may request the use a rate - or method of determining a rate - which they use for commercial purposes which is different from the above.
Yes. If the company is established in another EU Member State then you should make a claim under the European VAT Refund Procedure (Directive 2008/9). A non-EU business should recover the VAT under the 13th Directive.
Under both of these provisions there are strict time limits for making claims. Under the Directive 2008/9. the claim period covers the calendar year and claims must be submitted by the 30 September of the following year. Under the 13th Directive, the claim period runs from 1 July to 30 June of the following year with claims having to be submitted by 31 December of that year.
The provisions of the EC 13th Directive apply to any trader carrying on a business established in a non-EU country (subject to the normal conditions) as long as the trader is established in a country with a comparable system of turnover taxes and that country provides reciprocal arrangements for refunds to be made to taxable persons established in the UK. Thus, it is a condition of the refund scheme that the overseas trader's country allows similar concessions to UK traders in respect of its own turnover taxes. However, a claim will only be refused on these grounds if the trader's country has a scheme for refunding these taxes, but refuses to allow UK traders to use it.
Yes. There are certain items that businesses cannot recover VAT on. For example:
- Exempt supplies: where VAT relates to both taxable and exempt supplies, you need to make an apportionment. There is a standard method which you can use provided it gives rise to a fair and reasonable recovery of VAT. However, businesses often agree a special method with their local VAT office to arrive at an attribution and recovery of VAT that reflects their business.
- Non-business (including private) activities: where VAT relates to both business and non-business activities, an apportionment is required. Unlike the attribution between taxable and exempt supplies, there are no prescribed methods.
- Motor cars (excluding commercial vehicles): with certain exceptions businesses cannot recover VAT on the purchase of a motor car, and a 50 percent restriction applies to recovery on lease charges (excluding maintenance).
- Business entertainment: VAT is not generally recoverable on business entertainment costs but can be recovered on subsistence costs, staff entertainment and limited entertainment of overseas business customers.
- Purchases falling within the Tour Operators' Margin Scheme: the VAT on goods and services which fall under this scheme cannot be reclaimed
- Goods sold under one of the margin schemes for second hand goods: there are a number of schemes which provide for VAT to be accounted for on the goods' sales margin, but do not allow VAT recovery on the purchase of those goods.
International Supplies of Goods and Services
If a company sells goods to a customer who is registered for VAT in another EU Member State and the sale involves the removal of those goods from the UK (either by the company or its customer) to that Member State, then it does not need to charge VAT and may zero-rate the supply as an intra-EU dispatch. It must obtain your customer's VAT number and quote it on its invoice. It should also obtain evidence of the goods' removal from the United Kingdom.
If a company sells goods to a customer who is not registered for VAT in another EU Member State, it will have to charge UK VAT. If the sales exceed a certain threshold for that Member State it may have to register in the Member State under what is known as the Distance Selling Scheme.
If a company exports goods to a customer (business or private) outside of the EU, then it does not need to charge VAT; but, as for intra-Community sales, it should make sure that in all cases it keeps proof of dispatch/delivery to support the zero-rating.
To business customers: under the basic rule the place of supply of B2B services is where the customer belongs.
To non business customers: under the basic rule the place of supply is where the supplier is established. However the place of supply to non EU recipients is where the recipient belongs for the following services:
- transfers and assignments of copyrights, patents, licenses, trademarks, and similar rights
- advertising services
- services of consultants, engineers, consultancy bureaus, lawyers, accountants, and other similar services, as well as data processing and the supplying of information
- obligations to refrain from pursuing or exercising, in whole or in part, a business activity or a right referred to above
- banking, financial and insurance transactions including reinsurance
- the supply of staff
- the hiring out of movable tangible property with the exception of all forms of transport
- the provision of access to, and of transport or transmission through, natural gas and electricity distribution systems and the provision of other directly linked services
- radio and television broadcasting services
- electronically supplied services.
Exceptions to the basic rules
There are a number of exceptions to the basic rules which determine the place of supply (POS).
- immovable Property – POS where property is located
- passenger transport – POS proportionate to distance covered
- hiring of means of transport – for short term hire POS is where the transport is put at disposal of the customer
- restaurant and catering services on intra-Community journey – POS point of departure
For supplies to business customers only:
- admission to cultural, artistic, sporting, scientific, educational and entertainment events, and services ancillary to admissions (such as cloakrooms): POS where the event takes place.
For supplies to non business customers only:
- ancillary transport activities such as loading, handling, and similar activities - POS where carried out
- valuations of and work on movable tangible property - POS where carried out
- supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services – POS where activities take place
- supply of non intra-Community transport of goods - POS proportionate to distance covered
- supply of intra-Community supply of goods – POS place of departure
- supplies of electronic services by non EU suppliers – POS where customer established.
Use and Enjoyment
The UK applies use and enjoyment to a number of services including the hiring of goods and certain freight transport services.
When goods are imported into the UK from outside the EU, import VAT and customs duty may be due. This has to be paid or secured before the goods will be released from HMRC's control. This import VAT and duty can be paid on the company’s behalf by a freight agent or, alternately, the company might apply for a VAT and duty deferment account. This account allows it to defer the payment until the 15th day of the month following the month of importation. The payment is made by direct debit from the company’s bank account and covers all importations in the particular month.
Access the forms C1200 Application for Approval of Deferment Arrangements, C1201 Guarantee for Payments of Sums Due to the Commissioners of HM Customs and Excise and C1202 Duty Deferment - Instruction to your Bank or Building Society to pay by Direct-Debit on the HMRC’s web site.
If a business buys in certain services from outside the UK, it will be required to apply the reverse charge. This is intended to take away any VAT advantage of buying those services from outside the United Kingdom.
Under the reverse charge, businesses are required to account for a notional amount of VAT as output tax on their VAT return covering the period in which they made the payment and they recover this VAT as input tax on the same return.
If a business is able to recover all of its VAT, the reverse charge has no cost effect and is a VAT compliance matter only. However, if it is partly exempt there is likely to be a VAT cost depending on the level of recovery allowed under the partial exemption method.
The reverse charge applies to all services received in the UK from non UK suppliers. This will includeB2B services falling under the general rule. The UK has also extended the reverse charge mechanism for any other services where the place of supply is the UK. This optional reverse charge would allow for example a non UK supplier of taxable property in the UK, to opt not to register in the UK with the customer accounting for the VAT under the optional reverse charge. Given the place of supply changes introduced as part of the VAT package there are fewer services which fall into this optional category. The UK does not apply this optional reverse charge for goods.
Only for supplies to business customers. There is also no requirement to issue invoices to certain persons in other Member States where the supply is exempt
A tax invoice should contain the following data:
- a sequential number based on one or more series which uniquely identifies the document
- the time of supply
- the date of issue of the document
- the name, address, and VAT registration number of the supplier
- the name and address of the customer
- description sufficient to identify the goods or services supplied
- the unit price
- for each description, the quantity of goods or extent of services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency
- the gross total amount payable, excluding VAT, expressed in any currency
- the rate of any cash discount offered
- the total amount of VAT chargeable, expressed in pounds sterling (or GBP)
- where a margin scheme is applied under s50A or s53 of the Act a relevant reference or indication that the margin scheme has been applied
- where the customer is liable to pay the tax, a relevant reference or indication
- where exempt or zero-rated supplies are included on an invoice, each should be distinguished separately and the gross total amount payable in respect of each supply and rate should be stated.
If a business issues an invoice to a customer established outside the United Kingdom but elsewhere in the EU, the invoice does not have to contain the total amount of VAT chargeable unless it is a taxable supply. Similarly the description quantity or extent and rate of VAT, etc. is only required where a positive rate of VAT is chargeable. However such invoices to other EU persons should contain the following information over and above the remaining requirements:
- a GB prefix in front of the supplier’s registration number
- the VAT registration number, if any, of the customer including the two-letter country prefix
- where the supply is of a new means of transport, a description to identify it as such
- where the supply is an exempt or zero-rated supply an appropriate reference or indication.
Yes. The use of Electronic Data Interchange (EDI), advanced digital signatures and other forms of electronic invoicing is permitted in the United Kingdom. However, if a business is proposing to adopt a form of electronic invoicing other than EDI or advanced electronic signatures it is advised that they contact the tax authorities in advance to ensure that the proposed process will be able to satisfy them that there are sufficient controls in place to guarantee the authenticity of the origin and integrity of the data flow.
The UK is intending to implement the changes required under the VAT Directive 2010/45 with effect from 1 January 2013.
Yes, provided business have the agreement of your customer and you meet HMRCs' published guidelines before doing so. Note that if you show the incorrect amount of VAT on the self-billed invoice, HMRC can make you liable for the tax due.
The self-billed invoice should contain the legend 'The VAT shown is your output tax due to HMRC.
If a business issues VAT invoices in a foreign currency for supplies of goods or services that take place in the UK, it must convert and show the total amount of VAT in sterling.
Transfers of Business
Yes. If a trader sells its business as a going concern then VAT may not be due. There are certain conditions to satisfy, for example the purchaser should be registered for VAT at the time of the transfer (or immediately register as a consequence of the transfer) and should intend to use the assets to carry on the same kind of business. Where part of a business is transferred then that part of the business should be capable of separate operation and where property is included in the assets to be transferred special rules apply.
Options to Tax
There is an option to tax certain types of transactions in immoveable property. Once you have decided to opt to tax your interest in a property that decision cannot be revoked for 20 years. There are several anti-avoidance provisions surrounding the option to tax.
Measures were announced in the Budget 2008 relating to the option to tax. The first purpose of the changes was to enable tax payers to revoke an option after 20 years. The option to tax was first introduced on 1 August 1989, meaning the first options are now eligible for revocation. The second purpose was a rewrite to improve the layout of the legislation and simplifying the language.
Head Office and Branch transactions
If a head office makes a charge to its branch or vice versa this is not treated as a supply for UK VAT purposes.
If more than six months has passed from the due date for payment, then businesses are able to claim VAT back on the unpaid element through your VAT return. If they subsequently receive payment for the supply then they will have to pay back the VAT element to HMRC in the same way. Likewise if they have recovered VAT on an expense but after six months have not paid the supplier for the goods and services provided then they are required to repay to HMRC the VAT earlier recovered.
There are specific anti-avoidance provisions that apply between connected parties. These include:
- the ability to direct an open market value on taxable transactions where the recipient in unable to recover all the VAT as input tax
- a limitation on the option to tax certain leasehold interests
- transactions between domestic and overseas members of the same VAT group
- entry to and exit from a VAT group
- transactions within a VAT group.
Legislation (VATA1994 Sch11A) has been introduced that requires a UK VAT registered business to notify HMRC where they make use of known VAT avoidance arrangements. The types of arrangements caught by the new rules will be placed on a statutory list and published by HMRC. These new rules will only affect businesses which have UK turnover in excess of GBP 600,000 per year. Businesses that fail to notify HMRC will be subject to a penalty of 15 percent of the VAT saving achieved by using the scheme.
The same legislation also introduced a requirement for businesses with turnover in excess of GBP 10 million per year to notify HMRC when they enter into arrangements, the main purpose of which or one of the main purposes of which is to gain a VAT advantage, and which contain certain listed hallmarks of avoidance. This requirement will shortly be extended to schemes giving a tax advantage that does not appear on a business’s VAT returns, for example, in relation to VAT that cannot be deducted because it related to exempt supplies or non-business activity. Businesses that fail to notify HMRC will be subject to a penalty of GBP 5,000, unless the scheme has already been notified to HMRC by another party who has provided the business with the scheme number.
There are a number of penalties that apply in the United Kingdom for compliance failures. Late registration and VAT return penalties have already been addressed above.
The new penalty regime for inaccuracies applies to errors on VAT returns submitted after 31 March 2009. The application and quantum of penalties are now based on the taxpayer's behavior that led to the error rather than simply the size of the error itself. Thus, the new regime is driven by the behavior which leads to the inaccuracy.
There are three bands of penalty as set out in the table below with penalties of up to 100 percent of the tax due in the worst case scenario. Thus, the size of error and the use of voluntary disclosure (see below) is no longer a defense against a penalty - demonstration of reasonable care is the only defense under the new regime.
|Deliberate but not concealed
|Deliberate and concealed
Late payment interest is due where VAT has been underpaid. This is separate from any penalty and is designed to recompense the tax authority for loss of the revenue. The rate at which interest is charged is at the Bank of England rate plus 2.5 per cent
How often do tax audits take place?
This varies greatly depending upon the perceived risk of the businesses. Larger businesses will normally have a rolling programme setting out the areas of the businesses the authorities will look at.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
Not to our knowledge.
Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?
HMRC will give non statutory clearances where there is material uncertainty and the issue is commercially significant. HMRC will not provide clearances before transaction where the evidence does not support the fact that the transaction is genuinely contemplated. HMRC will also not provide clearances after the transaction has occurred. Clearances do not alter the tax treatment but simply give HMRC's view of what the correct tax treatment is.
Are rulings and decisions issued by the tax authorities publicly available in your country?
A domestic reverse charge for mobile phones, computer chips and emissions allowances. The UK continues to maintain a wide range of zero rates under Article 110.
HMRC previously offered time to pay arrangements during economic crisis. However such arrangements are of limited availability.