What is VAT?

Value Added Tax (VAT) in the European Union (EU) is a general, broadly based consumption tax that is assessed on the value added to goods and services. It applies to all goods and services that are bought and sold for consumption in the EU.

VAT is the following:

• A general tax that applies to all commercial activities involving the production and distribution of goods and the provision of services. If the annual turnover of the business is less than the £83,000 threshold, the business does not have to charge VAT on their sales.
• Charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.

How VAT works

VAT is charged on things like:

• Business sales
• Hiring or loaning goods to someone
• Selling business assets
• Commission
• Items sold to staff
• Business goods used for personal reasons
• “Non-sales”

Together, these are known as taxable supplies.

VAT-registered businesses must charge VAT on their goods or services, and they may reclaim any VAT they have paid on business-related goods or services.

If you are a VAT-registered business, you must report to HMRC the amount of VAT you have charged and the amount you have paid. This is done through a VAT return, which is due every three months.

Responsibilities

You MUST account for VAT on the full value of what you sell, even if you:

• Receive goods or services instead of money (for example, if you take something in part exchange)
• Haven’t charged any VAT to the customer, whatever price you charge is treated as including VAT

If you have charged more VAT than you have paid, you will have to pay the difference to HMRC. If you have paid more VAT than you have charged, you can reclaim the difference.