The standard rate of VAT reverted to 17.5% from 15% on 1st January, 2010 (but is set to increase to 20% on January 4, 2011); a reduced rate of 5% applies inter alia to domestic fuel or power, heating equipment, children’s car seats, some contraceptives and sanitary products, and certain residential property renovations.
Included in the list of supplies that are zero-rated are gold and UK bank notes, books, children’s clothing, charities, food, drugs & medicines, transport and sewage, water services, goods supplies to other VAT-registered entities within the EU, and certain transactions related to the construction of residential property.
Certain goods and services are exempt from VAT or may fall outside the scope of the UK VAT system. Items exempt from VAT altogether include insurance, credit services, education & training and the services of a doctor or dentist. Selling or leasing commercial property is exempt from VAT, though a business can opt to relinquish the exempt status that would allow VAT payable (input tax) to be reclaimed.
A business or sole trader must register for VAT if the goods or services provided are classed as taxable supplies in the UK, provided annual turnover exceeds GBP70,000 (increased from GBP68,000 prior to April 2010) or is expected to exceed this threshold. In a partnership, one partner should be nominated to execute the VAT returns.
Non-resident businesses or individuals with operations in the UK are still required to register if they meet any of the criteria for registration, subject to the threshold stated above. Non-resident businesses or individuals who have no place of business in the UK, but are nevertheless eligible for VAT registration by merit of: supplying VAT-liable goods or services in, to, or from the UK, assuming control of a VAT-registered business, or receiving VAT liable goods from another EU country (all subject to the GBP70,000 threshold), must register as a Non-Established Taxable Person (NETP).
Where a business is engaged in distance selling to customers in the UK (ie the sale of services or goods over the Internet or by mail order) and the business is based in another EU country and is registered for VAT in that country, then the business must register for UK VAT if the value of sales exceeds GBP70,000 per year. If alcohol and tobacco, or other excise duty goods, are sold by distance selling methods then VAT registration is compulsory regardless of turnover.
It is currently not possible to register online if non-UK resident.
VAT returns must usually be completed every three months. The VAT Return must detail the amount of VAT charged on sales (output) and the amount paid on purchases (input). VAT returns have, in recent years, been filed in paper or online, but by mid-2010 it is planned that all returns will have to be filed online and the VAT due paid electronically.
VAT returns are normally due one month after the end of the VAT accounting period. HMRC will specify on which quarterly dates a return is due. Returns filed online must be paid electronically. If VAT is due to be paid, HMRC will allow a further seven days for payment to be made.
If payment of VAT is late a surcharge will be levied by HMRC – usually 2% of the amount of unpaid VAT. Penalties will increase for continued late payment.
The EU VAT directives
As the UK is a member of the European Union, it is subject to European VAT legislation, as defined under the Sixth VAT Directive (2006/112/EC), and therefore, VAT-registered independents operating from the UK will be subject to the VAT directive, to the degree that the UK authorities are bound by it in putting in place standard and reduced rates within the permitted range, and setting the national rules regarding when and how VAT should be charged by registered businesses and individuals.
In addition, independents undertaking imports in excess (from January 2010) of GBP600,000 per year, or exporting more than GBP250,000 in taxable goods (but not services, as they are excluded) will be obliged to make declarations for Intrastat purposes. Intrastat has been put in place to collect data on trade in goods between EU member states.
Under new rules coming into force between 2010 and 2015 (with changes relating to telecoms, broadcasting and electronic services delayed until January 1, 2015), business to business (B2B) supplies of services will be subject to VAT in the country in which the consumer is located, rather than the supplier’s country of residence, with the business consumer required to account for VAT using the reverse charge mechanism (whereby they act as both the supplier and the consumer, charging themselves the VAT where appropriate, and then claiming it back).
For business to private consumer (B2C) supplies of services, the place of taxation with regard to VAT will remain as the supplier’s location.
There will, however, be certain exceptions, where the general rules do not apply, and specific rules will be in place, to reflect that the place of taxation should be where the service is consumed. Exempted areas will include: the electronic supply of services, telecommunications and broadcasting, certain catering and hospitality services, scientific and educational supplies, and cultural and sporting services and supplies.
The new rules have effectively removed the advantage of locating in an EU jurisdiction with a low VAT rate, such as Luxembourg or Madeira.