What is VAT charged on?
- Roger Clough
- Oct 28, 2024
- 3 min read
Updated: Dec 28, 2024
Subject: VAT – what is it charged on?
The VAT threshold is currently £90,000. Businesses with a turnover of less than £90,000 over the last 12 months do not have to register for VAT, but they may still register if they wish to. Once registered you will need to become something of a VAT expert in the goods and services that you sell, because there are different VAT rates and different places of supply.
Is VAT a luxury tax?
Not really, it may have been at one point but a series of budget changes and VAT tribunals have brought us to the point now where VAT at 20% is charged on items you wouldn’t consider a luxury and other items that you might think luxurious escape from VAT with a 0% rating. Cakes for example are zero rated (unless eaten on the premises, more about that later), while there is 20% VAT on a bottle of water
What are the different rates of VAT?
Some things are exempt from VAT, then there is the zero rate of 0% VAT, the reduced rate of 5% VAT and the standard rate of 20% VAT
What is the difference between exempt and zero rate VAT?
Zero rate VAT applies to items such as books, newspapers, fruit, vegetables, children’s clothes and shoes. You can also zero rate exports that you make from Great Britain (England, Scotland, Wales) to countries outside of the United Kingdom. Northern Ireland has different rules.
Some services are exempt from VAT, the most common ones being insurance, finance and bank charges.
If your business supplies a lot of zero-rated items you should probably register for VAT before reaching the threshold, as you will be able to reclaim VAT on your input costs. If your business supplies VAT exempt services then you are an exempt business and will not be able to register for VAT nor recover VAT on input costs.
What is reduced rate VAT levied on?
The most common service subject to reduced rate VAT is domestic fuel and power. So your gas and electricity bill at home, for example, or your heating oil. It also applies to child car seats and mobility aids installed in the home of someone over 60 years of age.
How do I know whether to charge zero rate VAT or standard rate VAT?
You must be aware of what you sell and do your research. This memo applies only to goods and services in Great Britain, please see our memo on VAT place of supply if you are exporting outside of the United Kingdom.
Here is a short list of things that are zero-rated for VAT, although this would change to standard rated if served on the premises or hot (intended hot for consumption):
Fruit
Milk
Milkshakes
Biscuits (unless chocolate covered)
Cakes (even if chocolate covered)
Jaffa Cakes (were famously found to be more cake-like than biscuit-like)
Books and magazines
While the following attract VAT at the standard rate:
Fruit juice
Ice cream
Chocolate covered biscuits
Bottled water
Plus many other goods and services, we have just listed a few here that may surprise you.
There are often changes to VAT through legislation and VAT tribunals, so it is best to have a trusted accountant on hand, or to consult the HMRC website for guidance. It wouldn’t be a bad idea to save a screen shot from the HMRC website as it could be changed later without you realising. Be wary of VAT advise published by anyone other than HMRC because although it was probably correct at the time of publication there is an awful lot of advice out there that is out of date.
About the author
Dr Roger Clough, founder
Roger has a PhD in UK food retail change, has lectured extensively in business finance and accounting, and has run several businesses over three decades. As an AAT Licensed Accountant he likes to be on a journey with clients rather than the kind of accountant who just prepares the statutory accounts after the year end – meaning that advice can be given and decisions can be made before it is too late.
About Clough Accounting
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Roger Clough t/a Clough Accounting is an AAT Licensed Accountant
© Clough Accounting, 2024
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