Focus on VAT rates

What is VAT?

Value-added tax (VAT) is charged on most goods and services in the UK. 

For businesses, it is important to know what VAT rate to apply to the goods and services you sell and how you can reclaim VAT on the goods and services you buy.

For individual consumers, VAT is included in the purchase price. The business collecting the VAT on the purchase then sends that on to the HMRC. However, that business, (assuming it is VAT-registered), may also claim back the VAT that it itself has paid on eligible business expenses such as office supplies. 

Let’s take an example. Sandra runs a small business selling new furniture. She sets the price of a table at £200. In order to sell the table, she needs to charge £200 + £40 (20% standard VAT rate of £200) = £240. Bob comes into the shop and buys the table for his dining room at home. Sandra keeps the £200 for her business but has to pay the £40 VAT to HM Revenue and Customs (HMRC). She does this by including it on her next VAT return. However, if Bob is actually buying the table for his workplace, in other words, if he is buying the table in the form of a legitimate business expense, he can claim back the £40 VAT he paid on the table by including it in his next VAT return. 

The date on which Sandra and Bob make their VAT returns will depend on the date on which their businesses were VAT registered and which VAT scheme they fall within. Most businesses file their VAT returns on a quarterly basis, reporting the VAT paid and collected over the preceding three months. For example, a VAT return filed in March reports on VAT paid out and collected in December, January and February. A VAT return filed in June reports on VAT in March, April and May. 

Different VAT rates

There are three basic VAT rates in the UK: the standard rate, the reduced rate and the zero rate.

The standard rate of VAT in the UK is currently 20%. This increased from 11% in 2011. This applies to most goods and services in the UK.

The reduced rate of VAT is currently 5%. This applies to a restricted range of goods and services, including children’s car seats, home energy bills, mobility aids for the elderly, smoking cessation products, electricity for domestic use and gas-fired boilers. 

The zero rate of VAT is obviously 0%. This is not the same as being VAT-exempt. The zero-rate VAT applies to most food and drink products, with certain exceptions, such as alcoholic drinks, hot food, ice cream, soft drinks and mineral water, to which the standard rate VAT applies. Other products that are zero-rated for VAT include equipment for disabled people, building services for disabled people, motorbike helmets, prescriptions dispensed by a registered pharmacist, sanitary protection products, septic tanks, solar panels, and a wide range of other goods and services.

Temporary VAT rates

In an attempt to mitigate the economic losses that the hotel, restaurant, catering and entertainment industries experienced following the coronavirus pandemic, the UK government introduced a temporary reduction on certain supplies of catering, hot takeaway food, hotel and holiday accommodation, as well as certain attractions including tickets to theatres, concerts, museums and cinemas. Under normal circumstances, these goods and services would be taxable at the standard rate of VAT (20%). From 15 July 2020, they were all eligible for the reduced rate of 5%.

This was a temporary reduction that was initially extended until 1 October 2021, when it was increased to 12.5%.

Although the industry hoped this temporary measure would be extended further or even made permanent, the rate reverted to the standard VAT rate on 1 April 2022.

Exemptions from VAT

Certain goods and services are exempt from VAT. This is not the same as being zero-rated. A wide range of goods and services are exempt from VAT, including lottery tickets, physical education activities, admission to zoos, antiques, charitable fundraising events, burials and cremations, and hospital and nursing care. 

A full list of VAT-exempt categories can be found on the HMRC website.

Conclusion

When you are new to running a business, knowing what VAT rate to apply can seem complicated. Sometimes it’s best to seek advice from a professional to make sure you are using the right VAT rate and the right VAT scheme. Mooncard can make things easier by keeping track of the VAT you’ve paid and how much VAT you have invoiced for. Get in touch today for a demo of how we can help.