Value Added Tax (VAT) is the main type of indirect taxation in the UK.
It is a tax on consumption which is applied during the production and distribution process to most goods and services. It is also applied to goods, and certain services, entering the country. Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process rests with the business making the supply i.e. the sale.
A business registered for the tax will charge VAT (output tax) on its sales and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the deductible input tax exceeds the output tax, a refund can be claimed.
A transaction is within the scope of UK VAT if the following conditions are met:
There are three rates of VAT that are applied to goods and services in the UK: the standard rate, the reduced rate, and the zero rate. In addition, some goods and services are exempt from the tax.
Businesses that make exempt supplies are unable to claim all the input tax that they incur, so the VAT paid to suppliers will be a ‘real’ cost.
Most goods imported into Great Britain from a country outside the UK, or to Northern Ireland from a country outside the UK and EU, are subject to import VAT. Where the importation is for business purposes, UK VAT registered importers may elect to account for import VAT on their VAT return via a “reverse charge” mechanism called Postponed Import VAT Accounting. For a fully taxable business the import VAT is recoverable as input tax so no net tax will be due. If they do not make this election, then the tax will have to be paid by the importer at the time of importation.
It is also important to note the interaction between VAT and customs duty.
Customs duty is levied at the point that goods are imported into the UK. It is levied in order to bring the cost of goods produced outside the UK up to a similar level as those produced within it. Once duty (and VAT) has been paid by the importer, the goods are in ‘free circulation’, and they can then be released for use in the UK. Unlike other indirect taxes, such as VAT, once duty has been paid it is not usually recoverable by the importer. It therefore represents a bottom-line cost to the importing business if it cannot be passed on in higher prices. It is therefore very important to ensure that the correct rate of duty is applied. VAT is charged on the value of the importation, including any customs duty.
A ‘person’ who either makes or intends to make taxable supplies of goods or services in the course or furtherance of a business must register for VAT if the value of its taxable supplies in the UK exceeds the annual registration limit (currently £90,000) or is expected to exceed the limit in the next 30 days alone. A business can register on a voluntary basis even if the registration limit has not been exceeded.
For these purposes, a ‘person’ includes any legal entity. Once a person is registered for VAT, all their business activities will be covered by the registration.
Two or more corporate bodies can be registered together as a VAT group if:
A corporate body cannot be treated as a member of more than one VAT group at a time.
The main advantage of VAT group registration is that, aside from a few limited exceptions, any supply of goods or services by a member of the group to another member of the group is disregarded for VAT purposes (subject to any anti-avoidance provisions). In addition, there is only one group VAT return to be submitted, by the representative member of the VAT group.
However, there are some disadvantages and any decision on whether to group register should be taken with care. For example, all VAT group members (including former members) are jointly and severally liable for the VAT debt of the group during the period of their membership. In addition, it is more likely that payments on account may be required, as the requirement for advance payments is determined based on the VAT liability of the VAT group as a whole.
A penalty may be imposed by the tax authority if a business fails to register at the correct time.
The normal VAT registration limit does not apply to businesses who are not established in the UK, but for the purposes of the tax are making taxable supplies there. Those businesses will need to register for VAT as soon as they commence trading in the UK, irrespective of the level of turnover.
There are specific VAT rules that impact non-UK businesses trading via online marketplaces and online marketplaces themselves. These rules are complex and to determine whether they affect the business further, clarification should be sought.
The UK VAT rules determining the place of supply of electronically supplied services supplied to private consumers (B2C) follow paragraph 15 of Schedule 4A to the VAT Act 1994, under which the place of supply of such services is the country where the recipient of the service belongs. This remains aligned with EU rules on the place of supply of such services.
The result of this is that local VAT is chargeable at the applicable rate in each of the Member States in which electronically supplied services are made (i.e. where the customer belongs). Therefore, B2C supplies of electronically supplied services to customers in the UK are subject to UK VAT.
From 1 Jan 2025, the EU changed its VAT treatment of live streamed events, including virtual events, to apply VAT where the service is consumed, regardless of the business or non-business status of the consumer. This is intended to bring the VAT treatment of virtual events in line with the rules for electronically supplied services (and normal place of supply rules for B2B services).
However, it is important to note that no such amendments have been made under UK law. UK VAT rules on the place of supply of virtual events continue to align with EU law that was in effect prior to the UK leaving the EU. Therefore, under UK VAT rules, the place of supply of virtual events is where the event takes place, even if the viewers are located in a different jurisdiction. This change to EU law may therefore result in double taxation (i.e. both UK VAT and EU VAT charged on the same transaction), or no taxation.
In general, the UK does not require EU or non-EU resident businesses to appoint a fiscal representative, however in some cases, for instance when the business has poor compliance records, the tax authority in the UK may direct a person to appoint a fiscal representative.
The tax authority in the UK may direct a person to appoint a VAT representative to act on their behalf for VAT purposes where the person:
Once appointed, the VAT representative is responsible to the same extent as the taxable person for all aspects of the taxable person’s VAT affairs, including liability for VAT.
VAT returns normally cover an accounting period of three months, ending on the last day of a calendar month. A business can request a specific accounting cycle to coincide with its financial or management reporting. Businesses that are in a net repayment position (because of the nature of their activities) and those incurring exceptionally high expenditure (e.g. because of set-up costs or a capital project) can apply to submit returns monthly to improve cash flow.
All VAT returns have to be submitted electronically within one calendar month and seven days after the end of the relevant accounting period, together with any tax due.
All VAT-registered businesses with a total VAT liability of £2.3 million or more in any 12-month period (or less), are required to pay advance instalments of their VAT return liability. The tax authority in the UK will usually provide a payment schedule outlining the payment deadlines.
Businesses whose estimated taxable turnover is £1.35 million or less (excluding VAT) in the next 12 months, can apply to join the Annual Accounting Scheme. The annual accounting scheme allows small and medium sized businesses to submit only one VAT return on an annual basis, two months after the VAT year end.
During the tax year, businesses who use the annual accounting scheme will need to pay their annual VAT liability via nine monthly or three quarterly instalments with the balance of VAT paid at the same time the VAT return is submitted.
A penalty may be imposed by the tax authority if VAT returns are not submitted on time, or the related tax is not paid by the due date. There is a penalty points system for the late filing of returns, and a separate penalty system for late payments.
For the first VAT return filed late, and for each subsequent late VAT return, the tax authority could issue a penalty point. Different thresholds of penalty points exist for monthly, quarterly and annual VAT returns, and once the relevant threshold is reached, the tax authority could impose a financial penalty of £200. Each subsequent late filing will incur an additional £200 penalty, unless the previous four VAT returns are submitted on time and all VAT returns for the last two years have been submitted (whether late or on time), which will reset the penalty points to zero. If the maximum penalty threshold is not reached, the penalty points will expire after two years.
For late payments of VAT, the amount of any penalty will depend on how late the payment is made. Any penalty imposed will be in addition to interest which is charged from the first day the payment is overdue. When VAT is paid between 16 and 30 days late, the tax authority could impose a penalty of 2% of the amount outstanding on day 15. If the VAT is still overdue on day 31, an additional 2% of the amount outstanding on day 30 may be charged. In addition, where the VAT is overdue for 31 days or more, a further penalty may be charged, calculated at a daily rate of 4% per annum on the outstanding amount.
Penalties might not be imposed where the taxpayer has a reasonable excuse for the late filing or late payment.
Intrastat declarations for Arrivals and Dispatches and EC Sales Lists may be required if there is trade with Northern Ireland. Otherwise, these reports are no longer required since the UK left the EU.
Yes. A range of penalties can be imposed where businesses do not comply with the VAT rules.
A penalty regime exists in relation to incorrect VAT returns, under which a penalty will be charged where a VAT return contains an inaccuracy which leads to an understatement of tax.
A business could be exposed to penalties for filing paper returns instead of electronic returns without permission from the tax authority.
Penalties may also be imposed where the business is late notifying the UK tax authority of its requirement to register for VAT.
The amount of the penalty for an incorrect VAT return, or for the failure to notify, is determined by the tax authority on a case-by-case basis and will depend on whether the inaccuracy or failure was careless or deliberate, concealed or not concealed, and whether the disclosure was prompted or unprompted. The maximum penalty that could apply in these circumstances is 100% of the potential lost revenue, however this could also be reduced to nil.
Interest is charged on all late payments of VAT, regardless of the reason for late payment.
Yes, it may be possible to reclaim the VAT incurred in certain circumstances. There is a scheme available for businesses established outside the UK to potentially reclaim the VAT charged on goods imported into the UK, or goods and services purchased and used in the UK, subject to certain conditions.
Examples of expenses on which UK VAT may be reclaimed are:
VAT typically cannot be reclaimed on the cost of buying or importing a car, or for goods and services:
The claim must be made no later than six months after the end of the ‘prescribed year’ when the VAT was incurred. The prescribed year runs from 1 July to 30 June, so claims must be made by 31 December.
A minimum claim amount applies, which depends on the length of the period the application relates to, however there is no maximum limit.
A VAT invoice must show:
For each different type of item listed on the invoice, the following must be shown:
Where a VAT invoice includes zero-rated or exempt goods or services, it must:
Where a business makes retail sales and makes a sale of goods or services for £250 or less including VAT, a simplified VAT invoice can be issued.
VAT invoices can be issued, received and stored in electronic format and there is no need to inform the tax authority. Electronic invoices must contain the same information as paper invoices. The method used to ensure authenticity of origin, integrity of content and legibility of the invoices is a business choice and can be achieved by any business controls which create a reliable audit trail between an invoice and a supply of goods or services.
While there is no SAF-T requirement in the UK, under the UK Government’s Making Tax Digital (MTD) provisions, all UK VAT-registered businesses (unless exempt from filing electronic VAT returns) are required to keep electronic VAT records and submit VAT returns electronically using software that is compatible with the UK tax authority’s systems.
The MTD regulations require each step of the VAT return journey from the digital records to the VAT return data to be 'digitally linked', and VAT returns to be submitted via an Application Program Interface (API) platform.
For the software to be compliant, it must therefore be either an API-enabled commercial software package which has the ability to keep and preserve certain specified digital records as required for a VAT return and file VAT returns, or bridging software that allows non-compatible software (i.e. spreadsheets) to connect to the tax authority’s systems.
In February 2025, HMRC launched a consultation on the promotion of e-invoicing across UK businesses and the public sector.
For further information on indirect tax in the United Kingdom please contact:
Karen Robb
T +44 (0)20 7728 2556
E karen.robb@uk.gt.com
