Value Added Tax (VAT) is a consumption tax added to almost all goods and services sold by VAT-registered businesses. Whether or not you register for VAT, you’ll encounter this tax in one way or another when running a business in the UK.
To help you understand this area of taxation, we’ve compiled a list of 34 VAT terms you should know as a UK business owner.
1. Accounting period for VAT
An accounting period for VAT is normally 3 months long. This is the timeframe reported in a VAT Return. After each quarterly accounting period, you must send a VAT Return to HMRC and pay any tax you owe.
However, if you use HMRC’s VAT Annual Accounting Scheme, your accounting period spans 12 months rather than 3. You file only 1 return per year, which is due after the end of the 12-month accounting period.
You can find details of your accounting period and deadlines in your VAT online account.
2. Annual Accounting Scheme
The VAT Annual Accounting Scheme is an HMRC scheme that allows eligible businesses to make advance payments towards an estimated annual VAT bill and complete only 1 VAT Return each year, rather than 4.
It can be beneficial to businesses in terms of managing cash flow, simplifying their administrative burden, and aligning their year-end accounting and filing dates.
You can join the Annual Accounting Scheme if:
- you are a VAT-registered business
- your estimated taxable turnover will not exceed £1.35 million in the next 12 months
You’re not eligible to join the scheme if:
- you left the scheme less than 12 months ago
- your business is part of a VAT-registered division or group of companies
- you are not up to date with your returns or payments
- your business is insolvent
You can only get one VAT refund a year under this scheme (when you send your annual VAT Return). Therefore, it may not suit your business if you need to reclaim VAT on a regular basis.
3. Acquisitions
In the context of Value Added Tax, acquisitions are supplies of goods brought into the UK from a supplier in an EU Member State.
You may be required to account for VAT in the UK on the acquisition of goods if:
- your UK business buys goods from a VAT-registered business in an EU country, and
- the goods are removed to Northern Ireland
You may be able to recover (reclaim) this VAT as input tax on the VAT Return for that period.
4. Cash Accounting Scheme
HMRC’s VAT Cash Accounting Scheme allows eligible businesses to account for VAT on sales and purchases at the time they receive or make payment, rather than when they issue or receive invoices.
You may be eligible to join the Cash Accounting Scheme if:
- you’re a VAT-registered business
- your estimated taxable turnover is £1.35 million or less in the next 12 months
You can’t join the scheme if:
- you use the VAT Flat Rate Scheme
- your business is not up to date with its returns or payments
- you have committed a VAT offence in the last 12 months
Businesses must leave the Cash Accounting Scheme if their taxable turnover exceeds £1.6 million.
5. De minimis limit
The de minimus limit relates to partial exemption from VAT. It is a threshold that allows partly exempt businesses to deduct input tax attributable to exempt supplies that would not otherwise be deductible.
The input tax cannot be more than £625 per month on average, and no more than half of the total input tax incurred by the business in the accounting period concerned.
6. Distance selling
Distance selling occurs when a business in Northern Ireland or the EU sells and delivers goods across an EU border and:
- the customer is not registered for VAT
- delivery is by or under the directions of the supplier of the goods
You can use the One Stop Shop (OSS) Union scheme to report and pay VAT on distance sales of goods from Northern Ireland to the EU.
7. Effective date of registration
The ‘effective date of registration’ is the date on which your business becomes liable for VAT registration, rather than the date you complete the application to register. It’s based on when you exceed, or realise that you will exceed, the VAT threshold of £90,000.
If your total taxable turnover for the last 12 months is more than £90,000, your effective date of registration is the first day of the second month after you exceed the threshold.
Example
- On 1 August, your total taxable turnover for the previous 12 months is £95,000
- This is the first time you’ve gone over the threshold
- Your effective date of registration is 1 October
If you expect to exceed the threshold in the next 30 days, your effective date of registration is the date on which you realise this, rather than the date it actually happens.
Example
- On 1 August, you arrange a £95,000 contract to provide services
- You will be paid this money by the end of August
- Your effective date of registration is 1 August
If you register for VAT voluntarily, you can specify your preferred date of registration on the application form.
8. Exempt supplies
Exempt supplies are goods and services on which no VAT is payable. Businesses do not charge VAT on exempt supplies, nor do consumers pay tax when purchasing these goods and services.
Some examples of exempt supplies are certain financial services, physical education and sports activities, fundraising events by charities, and subscriptions to membership organisations.
Refer to paragraph 29.4 of HMRC’s VAT guide (VAT Notice 700) for a full list of exempt supplies.
9. Flat Rate Scheme
The VAT Flat Rate Scheme is an HMRC scheme for small businesses, designed to simplify their VAT accounting and administrative burden.
Under this scheme, you:
- pay a fixed rate of VAT to HMRC, rather than calculating and reporting the tax on each sale and purchase
- keep the difference between what you charge to customers and pay to HMRC
- cannot reclaim the VAT on purchases, with the exception of certain capital assets over £2,000
You can apply to join the Flat Rate Scheme if:
- your business is registered for Value Added Tax
- you expect your taxable turnover (excluding VAT) in the next 12 months to be £150,000 or less
- your business is not closely associated with another business
You are not eligible to use the Flat Rate Scheme if:
- you stopped using the scheme in the 12 months before applying again
- you committed a VAT offence in the last 12 months
- you’ve joined (or were eligible to join) an existing VAT group in the last 24 months
- you’ve been registered for VAT as a business division in the last 24 months
- you use a margin or capital goods VAT scheme
The Flat Rate Scheme uses its own cash-based method to calculate turnover. Consequently, you can’t use this scheme alongside the Cash Accounting Scheme.
10. Import VAT
Businesses are usually liable to import VAT when they import goods into Great Britain (England, Scotland or Wales) from outside the UK or into Northern Ireland from outside the EU. This tax also applies to supplies of services received from a place outside the UK.
When importing goods, HMRC will normally charge the VAT rate that would have been applied if the goods had been purchased in the UK. A reduced rate is available if you import works of art, antiques, and collectors’ items.
11. Input Tax
Input tax, sometimes referred to as ‘input VAT,’ is the Value Added Tax that businesses pay on the purchase of goods and services from suppliers.
You can offset the input tax you incur in an accounting period against the output tax you charge to customers during the same period.
If the input tax exceeds the output tax, you can claim the difference from HMRC. However, if output tax exceeds input tax, you must pay the difference to HMRC.
12. ‘Out of scope’
Certain supplies are ‘out of scope’ for UK VAT, meaning that UK VAT does not apply to them. Goods and services are outside the scope if any of the following apply:
- sold or otherwise supplied by someone who’s not a taxable person
- sold or otherwise supplied outside the UK and the Isle of Man
- not made in the course of the furtherance of business
Some examples include:
- supplies that you buy and use outside the UK
- statutory fees – e.g. the London Congestion Charge
- goods that you sell as part of a hobby – e.g. stamps from a collection
- making donations to charity without getting anything in return
You can’t charge VAT when you sell anything that is out of scope, nor can you reclaim any VAT you pay when purchasing such items.
13. Output tax
Output tax, sometimes referred to as ‘output VAT’, is the amount of Value Added Tax that businesses charge to their customers when supplying taxable goods and services.
If your business is registered for VAT, you must charge and collect the correct rate of output tax on sales, report the tax in a VAT Return, and pay any VAT you owe to HMRC.
14. Place of Supply
The place of supply is one of the basic principles of VAT. It refers to the location where a particular supply of goods or services is deemed to take place for tax purposes. This determines where VAT is chargeable and payable.
Working out the place of supply of goods and services can be complex because it depends on the nature of the supply, where it’s made, and the status of the customer.
15. Reduced rate of VAT
One of three VAT rates in the UK, the reduced rate of 5% applies to goods and services that the Government considers essential or beneficial to consumers. These are known as reduced-rate supplies.
16. Reduced-rate supplies
Reduced-rate supplies are goods and services taxable at the reduced rate of 5% VAT. They include domestic fuel and power, children’s car seats, and the installation of energy-saving materials.
17. Residual input tax
Residual input tax is VAT that a partly exempt business incurs on purchases used to make both taxable and exempt supplies.
Examples include business overheads, such as accountancy fees and stationery, and expenditures relating to both types of supplies, such as advertisement costs.
Residual input tax is sometimes referred to as a ‘non-attributable tax’ because it’s not exclusively attributable to making only one type of supply.
18. Standard rate of VAT
The standard rate of VAT in the UK is currently set at 20%. This default rate applies to most goods and services in the UK, which are categorised as standard-rated supplies.
You should charge the standard rate on the goods or services you sell unless they are classed as reduced-rate, zero-rated, or exempt supplies.
19. Standard-rated supplies
Standard-rated supplies are goods and services subject to the standard rate of 20% VAT. Some examples of standard-rated supplies include consumer electronics, alcoholic beverages, confectionery, crisps and savoury snacks, and other general goods and services.
20. Tax point (time of supply)
The tax point, also known as the ‘time of supply’, is the specific point in time when VAT becomes due on a transaction. Typically, it depends on whether the business uses cash-basis accounting or accrual (traditional) accounting for VAT.
If you use accrual accounting, the tax point will be the date you issue the invoice, regardless of when the customer pays you. Whereas, if you use the cash basis, the tax point is the date you receive payment from the customer.
However, there are some exceptions. For example, if you supply goods or perform services more than 14 days before issuing a VAT invoice, the tax point is the date of supply rather than the invoice date.
21. Taxable supplies
Taxable supplies are any goods and services sold in the UK that are not exempt from VAT. This includes supplies that are zero-rated for VAT.
If your turnover from the sale of taxable supplies exceeds the VAT threshold of £90,000, you must register your business for VAT and start charging the correct VAT rate on all of your taxable supplies.
22. Taxable turnover
This is the total sales value (including profit but excluding VAT) of the taxable supplies you make in the UK in the course or furtherance of business.
It includes the value of all standard-rated, reduced-rate, and zero-rated supplies of goods and services, but not exempt items or any capital goods that your business owns.
The value of your taxable turnover determines your liability to register for VAT and your eligibility to apply to cancel your registration.
It should not be confused with taxable profit, which refers to the amount of money that’s left (residual earnings) after deducting all costs and expenses from turnover.
23. VAT certificate
When you register for VAT, HMRC will issue a VAT certificate as proof of registration. It’s sometimes referred to as a ‘VAT registration certificate’.
This document should arrive at your registered office or business address within 30 working days of registration. You can also access it by signing in to your VAT online account.
Your certificate will include important information relating to your business, including your unique 9-digit VAT number, the effective date of registration, and details of when to send your first VAT Return.
24. VAT exemption
VAT exemption refers to goods and services (supplies) that are not subject to VAT, as well as businesses that cannot register for VAT.
If all of the supplies you sell are exempt from Value Added Tax, your business is also exempt. As an exempt business, you cannot register for VAT or reclaim any VAT on business purchases or expenses.
Some businesses are partly exempt. Partial exemption applies when a business sells both taxable and exempt goods or services.
If your business is partly exempt, you can register for VAT and charge VAT on the taxable supplies you make. However, you can’t charge VAT on your exempt sales, nor can you recover the tax you pay on any purchases relating to those sales.
25. VAT invoice
As a VAT-registered business, you must issue VAT invoices when you sell standard-rate or reduced-rate goods or services to other VAT-registered businesses.
The invoice should contain certain details about your business, including your VAT registration number, the time of the supply, and the amount of tax chargeable on the supply.
26. VAT registration number
A VAT registration number (VRN) is a unique 9-digit number that HMRC issues to a business when it registers for VAT. It is a type of tax identification number that helps to identify VAT-registered businesses.
Your VRN will begin with ‘GB’. For example, GB 123456789. However, if you trade under the Northern Ireland Protocol, you will need to use the prefix ‘XI’ for transactions relating to the movements of goods between Northern Ireland and the EU. For example, XI 123456789
You can find your VRN on your VAT certificate, on letters from HMRC about your registration, in your VAT online account, and on the HMRC app.
As a VAT-registered business, you must include this on all invoices you raise. You’ll also need it when submitting VAT Returns, paying your VAT bill, reclaiming VAT, and purchasing goods or services from other VAT-registered businesses.
27. VAT rate
Different VAT rates apply to different goods and services, whilst some things are exempt from VAT or ‘out of scope’. The current rates of VAT in the UK are:
- Standard rate – 20% – applies to most goods and services
- Reduced rate – 5% – applies to certain goods and services, such as children’s car seats and home energy
- Zero rate – 0% – applies to zero-rated goods and services, such as most food and children’s clothing
Knowing and charging the applicable VAT rates for every product or service you sell is crucial.
28. VAT registration
VAT registration is the process of registering a business for VAT with HMRC. Most businesses can register online. However, in certain situations, you may need to register by post.
Registration is compulsory if:
- your total taxable turnover for the last 12 months is more than £90,000 (the VAT threshold), or
- you expect your taxable turnover to exceed £90,000 in the next 30 days
You must also register (whatever your taxable turnover) if you and your business are based outside the UK and you supply any goods or services to the UK (or you expect to do so in the next 30 days).
If your taxable turnover is below the threshold, you can register voluntarily. The registration process is exactly the same.
29. VAT Registration Estimator tool
Launched by HMRC in July 2024, the VAT Registration Estimator is a digital tool that you can use to work out the potential impact of registering for VAT. For example, it can estimate how much VAT you might have to charge and pay on sales, or how much you may be able to reclaim on purchases. It’s a really useful tool for anyone thinking about VAT registration or making changes to their supplies.
30. VAT Return
A VAT Return is a type of tax return that tells HMRC how much Value Added Tax you’ve charged on sales and how much you have paid to other businesses during an accounting period.
Most businesses need to complete a VAT Return every 3 months. However, if you join the Annual Accounting Scheme, you only send 1 tax return a year.
The information you provide on the return determines the amount of tax you owe and the amount you can reclaim.
The deadline for submitting a VAT Return is 1 month and 7 days after the end of the accounting period. Any VAT due must be paid by the same deadline.
31. VAT threshold
The VAT threshold represents the point at which you are legally required to register for Value Added Tax in the UK. For most businesses, it is £90,000 and based on taxable turnover.
You must register if your taxable turnover exceeds the threshold (or you expect it to) within a certain timeframe. There are different thresholds for businesses engaging in distance selling or those using certain VAT accounting schemes.
32. Voluntary registration
Voluntary registration occurs when a small business chooses to register for VAT when its taxable turnover is below the VAT threshold of £90,000.
There are several potential benefits of doing so, including the ability to reclaim VAT on purchases, creating the appearance of being a more established business, and appealing to VAT-registered business customers.
33. Zero rate of VAT
The zero rate applies to certain taxable supplies, but the actual tax charge to the customer is 0%. This may seem odd, but it means that:
- businesses can include the sales value of those supplies in their taxable turnover
- they can recover the VAT incurred on costs associated with making the supplies
- no tax burden is placed on the consumer
This rate applies to essential goods, including most food items for human consumption, books and newspapers, children’s clothing and footwear.
34. Zero-rated supplies
Zero-rated supplies refer to goods or services that are subject to 0% Value Added Tax. This means they are classed as taxable items but no tax is charged or collected by the seller. Essentially, they’re tax-free to consumers.
Thanks for reading
VAT is something that almost all businesses have to deal with at some point, so it’s worthwhile familiarising yourself with the most common terms you’re likely to encounter. However, it is a particularly complex area of taxation. Appointing an accountant is the best way to navigate the VAT rules and ensure compliance.
Are there any other VAT terms you’d like to see covered in this guide? Please let us know in the comment section below, and we’ll do our best to provide you with an answer.