What is VAT?

… and how does it work?

In the UK, VAT or “value-added tax” is a wide-ranging tax that applies generally to business transactions.

In the UK, VAT is generally charged at 20% (the “standard rate”), although some supplies are charged at a reduced rate (e.g. domestic supplies of gas and electricity) and a zero-rate can also apply, e.g. to books and children’s clothing.

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When does VAT apply?

A VAT charge arises whenever the following conditions are met:

  • There is a taxable supply…

  • of goods or services…

  • for consideration…

  • by a taxable person…

  • in the course of business…

  • in the UK.

Let’s break that down…

There is a taxable supply…

This is a deceptively wide statement, as all supplies are taxable unless they fall within a specific exception set out in the rules, such as an exemption or zero-rating. For instance, most supplies of financial services or insurance are exempt from VAT, and most supplies of children’s clothes and food are zero-rated. In each case, no VAT is charged on their sale.

… of goods or services …

Another broad catch-all, as services can be defined as everything which is not goods. The distinction between them is mostly obvious, but there are a few exceptions, for instance, supplies of electricity (bizarrely) are supplies of goods, whereas supplies of land and generally services, except sales of freeholds and long leases over 21 years, which are goods.

… for consideration …

Any transaction where something is done or given in return for something else is a supply for these purposes. Consideration means anything of value, so this could be money or something else valuable. A pitfall that often catches people out is that this means that barter transactions where no money changes hands can be a supply for VAT purposes, if each side gives something of value to the other.

… by a taxable person …

A taxable person can be seen as someone who is registered for VAT or who ought to be registered if they followed the rules correctly. Anyone who makes or intends to make taxable supplies is entitled to register for VAT, and if the value of those supplies goes over a certain minimum threshold (currently £85,000), that registration is compulsory. Note that for overseas suppliers without a presence in the UK, the registration threshold can sometimes be nil.

… in the course of business …

whether something is done in the course of business can sometimes be difficult to decide, for instance if profit is not a motive (often the case for charities). Generally, if goods or services are provided in return for a charge, there’s a business activity for VAT purposes.

… in the UK.

there are rules to decide where a supply takes place for VAT purposes, which can get complicated. How these work will be the subject of a later article in this series. If the supply takes place in the UK under these rules, then UK VAT rules apply. If it takes place elsewhere then VAT may apply in that country, but the supply will be outside the scope of UK VAT.

I recommend you do X instead of Y
— Linda Adelson

Another subheading here

In the UK, the rules are based on EU law, and all EU member states have similar rules.

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About the author

Linda Adelson is Rosetta Tax’s resident VAT expert, who has specialised in all aspects of VAT and indirect tax for over 25 years. One of just a handful of VAT solicitors in the UK, Linda is ranked by the Legal 500 as a Leading Individual for the depth of expertise in her field.

Find out more about Linda and our VAT advice and consultancy services for businesses.

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