Value Added Tax (VAT) Guidelines: United Kingdom

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published on 23 March 2022

 

 

This country summary is part of the comprehensive Focus on VAT Fellows: International Value Added Tax (VAT) Guidelines »



1. VAT Scope, VAT Rates and VAT Exemptions

For the levy of VAT, 4 different types of taxable transactions/taxable events are to be distinguished:
  • The supply of goods by an entrepreneur
  • The supply of services by an entrepreneur
  • The import and export of goods from Great Britain
  • The intra-Community acquisition/dispatch of goods from Northern Ireland
 
The phrase “supply of goods” is given a broad interpretation, for the avoidance of any doubt. Goods are all physical objects, but also include items such as electricity. For VAT purposes, “providing services” concern all activities that do not include the supply of goods and which are performed for remuneration.
 
The place of supply rules are important since they determine where the VAT is due, i.e. where the services are physically performed or where the customer or supplier belongs.
 
The VAT rate businesses charge depends on the nature of the goods and services. Currently there are three different rates: standard rate of VAT is currently 20 percent, reduced VAT rate of 5 percent and zero VAT rate 0 percent.
 
Exempt supplies are those where no VAT is charged, this includes items such as; freehold sale of land and buildings, rent of land or buildings, financial, education and health supplies. 
 
If a business exports goods to a customer (business or private) outside of UK and the supplier arranges for the goods to be transported the supplier does not charge VAT. The same applies if a business customer arranges for the transport of the goods, provided the invoice is to a non-UK customer.
 
If a business sells goods from Northern Ireland; to a customer who is registered for VAT in another EU Member State and the sale involves the removal of those goods from NI (either by the supplier or the customer) to that EU Member State, then the business does not need to charge VAT and may zero rate the supply as an intra-Community shipment.
 
If a business sells goods from Northern Ireland; to a customer who is not registered for VAT in another EU Member State and the sales involves the removal of those goods from NI by the supplier, the supplier will have to charge the appropriate rate of UK VAT. 
 
Supplies of services provided to an entrepreneur for business purposes (B2B services) are generally considered to have been made where the recipient of the service is established. The place of supply of services to non-entrepreneurial customers (B2C services) is usually where the business providing the services is established. 

 

2. VAT registration and simplifications

If a business makes supplies of taxable goods or services in the UK the business is required to register for VAT if the turnover exceeds the registration threshold.
 
If the turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current registration threshold of GBP 85,000, or it is expected to exceed that figure in the next 30 days alone, the entrepreneur must register for VAT. 
 
There is no threshold applicable to entrepreneurs who do not belong in the UK. The registration date will be the earliest date that either the entrepreneur makes taxable supplies in the UK or the entrepreneur expects to make taxable supplies here within the next 30 days.
 
The entrepreneur must register as a Non-Established Taxable Person (NETP). The entrepreneur may need to register for VAT, to recover import VAT and to charge UK VAT on the sale as appropriate. If a non-EU entre­pre­neur is moving goods to Northern Ireland – then a UK VAT Registration will also be required.
 
If an entrepreneur supplies goods and services both inside and outside the UK, then the entrepreneur will need to register for UK VAT if the total value of the supplies exceeds the registration threshold.
 
There is potential cash flow advantages of being able to charge VAT on sales and claim back VAT on purchases, which an entrepreneur may benefit from depending on these circumstances. An entrepreneur can apply to back­date a voluntary VAT registration by up to four years.
 
If entrepreneurs are operating in Northern Ireland, i.e. receiving goods from EU member states or dispatching of goods from NI to EU member states, the entrepreneur must register for UK VAT with the Northern Irish XI VAT Number, which is specific for Northern Ireland trade with the EU: 
  • Reverse charge: The UK reverse charge is a mechanism, which shifts the responsibility for accounting for VAT to HMRC from the supplier to the recipient (i.e. reversing the obligation). The reverse charge applies when:
    • VAT Taxable Services are supplied by a person belonging outside the UK
    • Recipient is a business that is, or should be, registered for VAT in the UK
    • Place of supply of the services in question is inside the UK 
    • Construction Industry Services – provided to an intermediary   
  • Imported Goods: If the only taxable supplies in the UK 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 UK.
  • EU Triangulation only with Northern Ireland
  • Capital Items: The sale of capital items is not included in the calculation of turnover for UK VAT registration purposes.

 

3. Declaration requirements and penalty regime

VAT registered businesses are required to submit digital VAT returns on a quarterly basis through Making Tax Digital compatible software. If the annual tax liability exceeds GBP 2.3Million then the business will also be required to make interim monthly payments on account (alternatively, entrepreneurs can opt to submit monthly VAT returns). 
 
If an entrepreneur is in a repayment position because its input tax exceeds its output tax, the entrepreneur can opt to submit monthly VAT returns which will ease its cash flow.
 
Failure to submit VAT returns and settle any outstanding VAT payments on time may result in a default sur­charge. For example, the first late submission in a 12-month period, will result in a warning. The second late VAT payments or VAT returns in a 12-month period will give rise to a 2 percent penalty of the VAT due on the second return. The penalty increases firstly to 5 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 by way of appeal.
 
Entrepreneurs operating in Northern Ireland are required to submit an European Sales Listing (ESL) for goods and service either using HMRC’s online services or through VAT 101 form. For goods ESLs are on a monthly basis. Where the quarterly value is less than EUR 35,000 returns can be submitted quarterly. For 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.
 
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 1.5 million and GBP 250,000 for dispatches.
 
The Intrastat Penalty regime may result in criminal proceeding and could result in a Magistrates Court case, although HMRC normally prefer to compound any proceedings. This involves the offer of an administrative fine in lieu of any court proceedings.
 
There is a number of penalties that apply in the UK for compliance failures. The application and quantum of penalties are based on the taxpayer’s behaviour that led to the error rather than simply the size of the error itself. Thus, the regime is driven by the behaviour 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 VAT due in the worst case scenario. Thus, the size of error and the use of voluntary disclosure is no longer a defence against a penalty – demonstration of reasonable care is the only defence under the regime.
 
​The scale of penalties for incorrect returns under the new regime is shown below: Type of behaviour
​Statutory maximum penalty                                                                                  
​Statutory minimum penalty with unprompted disclosure     
​Statutory minimum penalty with prompted disclosure                                  
​Careless
​30%
​0%
​15%
​Deliberate but not concealed
​70%
​20%
​35%
​Deliberate and concealed
​100%
​30%
​50%
(For an optimal display of the table, the use of a desktop PC or tablet is recommended.)
 
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 percent.
 
All penalties applied by the tax authority give right to an appeal by the taxpayer or its tax agent on the entrepre­neurs behalf. If there is a reasonable excuse or reason for the penalty – the penalty can be suspended or mitigated in full. A suspension of penalties may involve an agreement with the tax authority over a 12-month period to avoid any further errors of a similar nature.
 

4. VAT recovery

In some cases, overseas businesses which are not UK VAT registered may be able to claim back UK VAT charged on goods and services under a special refund. The application is a VAT65A and can be submitted to the tax authority via post/email. A Tax agent in the UK can be appointed to assist entrepreneurs to review and submit on your behalf. 
 
The applicant must be a taxable person established outside of the UK. Entrepreneurs making its first applica­tion must also include a certificate from the official authority in their own country showing they’re registered for business purposes in that country.
 
The refund will be paid within 6 months of receiving a satisfactory application. HMRC may charge penalties for incorrect applications – it is recommended the refund application is reviewed by a UK VAT consultant to avoid incorrect applications for refunds.
 
The refund period must not be more than one calendar year, the prescribed year is 12months from 1 July to 30 June of the following calendar year, the application must be submitted no later than 31 December. 
 
VAT on employee expenses can be claimed even when it may appear that the supply has been made to the employee and not the employer. Here are some examples of supplies made to the employer, provided the employer meets the full cost, even when it may look as if the employee has received the supply:
  • Road fuel and other motoring expenses
  • Subsistence costs such as meals and accommodation necessarily paid for whilst away from the normal workplace
  • Removal expenses arising from company relocations or transfer of staff
  • Sundry items such as small tools or materials purchased on site
 
If the supply is legitimately paid for by the employer for the purpose of the business then input tax is recover­able. This is in keeping with the intention of the legislation.

 

5. Invoicing

The requirements for formal invoicing only apply to businesses where supplies are provided to business customers. 
 
The use of Electronic Data Interchange (EDI), advanced digital signatures and other forms of electronic invoi­cing is permitted in the UK. Entrepreneurs can choose a method of ensuring authenticity, integrity, and legibi­lity which suits your method of operation. Examples of approaches for ensuring authenticity and integrity include:
  • an advanced or “qualified” electronic signature  
  • Electronic Data Interchange (EDI)  
  • business controls which create a reliable audit trail between an invoice and a supply of goods or services
 
Self-billing is a commercial arrangement between a supplier and an entrepreneurial customer in which the customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment providing a formal agreement has been set up between parties. 
 

6. Others

Two or more corporate bodies that are under common control and are resident, or have an establishment, in the UK may apply to register together as a VAT group. The common control need not be direct, and corporate groups can pick and choose which companies to include in any group registration. 

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