When can I charge VAT, and on what?
You can only charge VAT if your business is registered for VAT.
VAT is charged on things like:
- business sales - eg when you sell goods and services
- hiring or loaning goods to someone
- selling business assets
- items sold to staff - eg canteen meals
- business goods used for personal reasons
- ‘non-sales’ like bartering, part-exchange and gifts
These are known as ‘taxable supplies’. There are different rules for imports and exports and charities.
- must charge VAT on their goods or services
- may reclaim any VAT they’ve paid on business-related goods or services
If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.
You may want to appoint an agent to deal with HMRC on your behalf.
You must account for VAT on the full value of what you sell, even if you:
- receive goods or services instead of money (eg 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’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.
There are 3 different rates of VAT and you must make sure you charge the right amount.
Get a list of reduced or zero-rated goods and services
Most goods and services are standard rate. You should charge this rate unless the goods or services are classed as reduced or zero-rated.
When to charge this rate can depend on the item being provided but also the circumstance of the sale. For example:
- children’s car seats and domestic fuel or power are always charged at 5%
- mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home
Zero-rated means that the goods are still VAT-taxable, but the rate of VAT you must charge your customers is 0%. Examples of zero-rated goods include:
- books and newspapers
- children’s clothes and shoes
- motorcycle helmets
You still have to record zero-rated transactions in your VAT accounts and report them on your VAT Return.
Rates can change and you must apply any changes to the rates from the date they change.
What you must do when charging VAT
You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases.
If a transaction is a standard, reduced or zero-rated taxable supply, you must:
- charge the right rate of VAT
- work out the VAT if a single price is shown that includes or excludes VAT
- show the VAT information on your invoice
- show the transaction in your VAT account - a summary of your VAT
- show the amount on your VAT Return
You may be able to reclaim the VAT on purchases that relate to these sales.
You can’t claim back all of the amount you’ve paid if you pay the wrong amount of VAT on a purchase.
VAT-inclusive and exclusive prices
You’ll need to make a calculation when charging VAT on goods or services, or when working out the amount of VAT you can claim back on items which were sold inclusive of VAT.
To work out a price including the standard rate of VAT (20%), multiply the price excluding VAT by 1.2.
To work out a price including the reduced rate of VAT (5%), multiply the price excluding VAT by 1.05.
To work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2.
To work out a price excluding the reduced rate of VAT (5%) divide the price including VAT by 1.05.
You can’t charge VAT on exempt or ‘out of scope’ items.
Exempt goods and services
Exempt goods or services are supplies that you:
- can’t charge VAT on
- must not include in your VAT records
If you buy or sell an exempt item you should still record the transaction in your general business accounts. Examples of exempt items include:
- postage stamps or services
- health services provided by doctors
Businesses that sell only VAT-exempt goods and services don’t have be registered for VAT. If you start selling items that aren’t exempt, you can register for VAT voluntarily. You must register if the total value of non-exempt goods and services goes over the VAT taxable turnover threshold
Out of scope
Some goods and services are outside the VAT tax system so you can’t charge or reclaim the VAT on them. For example, out of scope items include:
- goods or services you buy and use outside of the EU
- statutory fees - like the London congestion charge
- goods you sell as part of a hobby - like stamps from a collection
- donations to a charity - if given without receiving anything in return
Charging VAT to charities
As a VAT-registered business, you can sell certain goods and services to charities at the zero or reduced rate of VAT.
It’s your responsibility to check the charity is eligible, and to apply the correct rate.
Community amateur sports clubs (CASCs) don’t qualify for VAT reliefs for charities.
Check the charity is eligible
To make sure the charity is eligible, ask them for:
Evidence of charitable status
- evidence that they’re a charity
- a written declaration or ‘certificate’ confirming they meet the conditions for the particular VAT relief
The charity should give you either:
- their Charity Commission registration number
- a letter of recognition from HM Revenue and Customs (HMRC) if they’re not registered with the Charity Commission for England and Wales (eg if they’re a Scottish or Northern Irish charity)
Charities are legally required to give you an eligibility certificate when you supply eligible building or construction services to them at zero VAT. The certificate must contain specific information.
A declaration is not legally required for other items you sell at the zero or reduced rate, but you should ask for one to prove the charity is eligible for the relief.
These sample declarations contain examples of the information a charity should give you when buying:
- medical and scientific equipment, motor vehicles and computer software
- charity advertising
- goods and services for disabled people
The written declaration should be separate from the order form or invoice for the goods or services the charity is buying.
You must keep the completed declarations for at least 4 years.
Items that qualify for the reduced rate
You may be able to apply the reduced VAT rate when you sell fuel and power in certain circumstances to an eligible charity.
Items that qualify for the zero rate
You may be able to apply zero VAT when you sell the following to an eligible charity:
Equipment for medical and veterinary use
- advertising and items for collecting donations
- aids for disabled people
- construction services
- drugs and chemicals
- equipment for making ‘talking’ books and newspapers
- lifeboats and associated equipment, including fuel
- medicine or ingredients for medicine
- resuscitation training models
You may also be able to zero-rate some other medical and veterinary equipment when you sell it to:
- certain health bodies, eg NHS Trusts
- not-for-profit research institutions
- charities that provide institutional care, or medical or surgical treatment for chronically sick or disabled people
- charities that provide transport services for disabled people
- charities that provide rescue or first aid services to humans or animals
- someone buying it specifically for donation to one of these bodies
The money used to buy the equipment must be from charitable or donated funds. This should be stated on the eligibility declaration.
The eligible items include:
- medical, veterinary and scientific equipment
- goods for disabled people
- motor vehicles for medical use<
- rescue equipment
- resuscitation training dummies
When you return goods to a supplier or a customer returns goods to you, the balance of payment can be settled by issuing either a:
- replacement invoice
- credit or debit note
If you exchange the goods for goods of the same value you don’t need to issue a new VAT invoice.
Credit and debit notes
These must show the same information as the VAT invoice and:
- why it was issued
- the total amount credited, excluding VAT
- the number and date of the original VAT invoice
VAT may have to be charged on discounts and deals.
||How to charge VAT
||Charged on the discounted price (not the full price)
||Charged on the gift’s full value - there are some exceptions listed below
||Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
|Money-off coupons, vouchers etc
||No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
|‘Face value’ vouchers that can be used for more than one type of good or service
||No VAT due, if sold at or below their monetary value
|Redeemed face value vouchers
||Charged on the full value of the transaction
|Redeemed face value vouchers sold at a discount
||Charged on the discounted value of the transaction
|Link-save offers (buy one get one free or discounted)
||VAT is apportioned as mixed-rate goods - there are exceptions
Exceptions for gifts and link-save offers
There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.
VAT is charged on the combined value of link-save items if the incentive product:
- has a resale value of less than £1
- has a sale value of less than £5
- costs you less than 20% of the total of the other items in the offer
- isn’t sold at a separate price from the main product
Free goods and services
You don’t have to pay VAT on things like free samples if they meet certain conditions.
||Condition to meet so no VAT due
||Used for marketing purposes and provided in a quantity that lets potential customers test the product
|Free loans of business assets
||The cost of hiring the asset is included in something else you sell to the customer
||The total cost of all gifts to the same person is less than £50 in a 12 month period
||You don’t get any payment or goods or services in return