Category: Value Added Tax

VAT on goods you export

Exports from Great Britain or Northern Ireland can be zero-rated for VAT, provided businesses obtain valid export evidence within three months of sale and meet all HMRC documentation rules; accuracy and record-keeping are key to keeping the 0% rate.

Businesses are required to charge VAT on most goods that are sold within the UK. However, there are VAT exemptions in place on goods that you export outside of the UK.

Under the VAT rules, businesses can "zero rate" the sale of qualifying goods that are exported. Where this is the case this would mean that no VAT is charged on the goods.

This applies to:

• Goods exported from Great Britain to a destination outside the UK.
• Goods exported from Northern Ireland to a destination outside the UK and EU.

To qualify for VAT zero-rating, businesses must ensure they have sufficient evidence that the goods were exported. This evidence should be obtained within three months of the ‘time of sale’. A longer period may apply in cases where goods need to be processed before export or for thoroughbred racehorses.

The ‘time of sale’ for VAT purposes is the earlier of when the goods are dispatched to the customer or when full payment is received.

It is important to note that businesses cannot zero-rate sales if a customer requests delivery to a UK address. If a customer arranges for collection from the seller (an indirect export), VAT zero rating may still be possible if certain conditions are met.

Maintaining accurate records and ensuring compliance with export requirements is essential to benefit from the VAT zero-rate provisions. Businesses must ensure that they hold proper export documentation and follow the guidelines carefully to avoid penalties and ensure the correct VAT rate is charged.

VAT – Entertainment provided to directors and partners of a business

When considering VAT on entertainment provided solely to directors or partners of a business it is generally not recoverable as VAT Input Tax.

HMRC considers that directors and partners are not in need of entertainment to motivate themselves, so such costs are not for business purposes. However, exceptions apply for subsistence costs (e.g., meals or accommodation during business travel), and no apportionment is needed when directors or partners attend general staff events.

In contrast, VAT incurred on entertainment for employees, such as staff parties, team-building events, or outings, is usually considered by HMRC as a business expense and can be fully recovered.

In cases of mixed entertainment, where both employees and non-employees (e.g., guests) are present, the VAT must be apportioned. Only the portion relating to employees is recoverable. VAT on entertainment for non-employees is generally blocked, unless the guest is an overseas customer, in which case input tax is not blocked, but output tax may apply.

Exception from VAT registration

Businesses over £90,000 turnover must register for VAT, but HMRC may grant exceptions if the increase is temporary.

A business must register for VAT if either of the following applies:

1. At the end of any month, its taxable turnover in the previous 12 months has exceeded £90,000; or
2. At any point, it is reasonable to expect that taxable turnover in the next 30 days alone will exceed £90,000.

If a business temporarily exceeds the VAT registration threshold, they may be able to apply for an exception from VAT registration with HMRC. This applies if their taxable turnover has gone over the threshold in the last 12 months, but the business can show it will not go over the deregistration threshold (£88,000) in the next 12 months. This exception must be applied for by contacting HMRC to request and complete forms VAT1 and VAT5EXC. It’s important to note that this is different from a full VAT exemption.

Once an application is submitted, HMRC will respond within 40 working days to confirm approval or refusal. If approved, the business will not be registered for VAT at that time but will remain required to monitor their turnover monthly in case their circumstances change, and VAT registration is required. If the exception is denied, HMRC will register a business based on the information provided, and the business will be required to account for VAT from the date their liability began.

Unauthorised issue of a VAT invoice

Issuing a VAT invoice without registration or authorisation can lead to HMRC penalties, even if it is done by mistake.

A penalty may be charged by HMRC when an individual or business issues an unauthorised VAT invoice showing or including VAT without being allowed to do so. The invoice does not need to be a formal VAT invoice; it only needs to show an amount that is shown as VAT or includes an amount attributable to VAT.

An unauthorised person is anyone who is not registered for VAT, not part of a VAT group, or not otherwise authorised to act on behalf of a taxable person, such as an insolvency practitioner or an auctioneer selling goods to recover a debt. Common examples include businesses operating below the VAT registration threshold, individuals who issue VAT invoices after deregistration or businesses who begin charging VAT before being VAT registered. Farmers who are not certified to use the VAT agricultural flat rate scheme, but issue flat rate invoices may also face penalties.

A penalty may be avoided if the person has a reasonable excuse for the error. However, unauthorised issuing of VAT-related invoices is treated seriously and may result in financial penalties.

When you cannot charge VAT

Not all goods and services carry a 20% VAT, knowing the right rate can save costly mistakes.

When a VAT-registered business issues an invoice to their customer, they must ensure that they charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions to be aware of. This includes the reduced VAT rate of 5% and the zero rate (0%).

There are two other categories that the supplies of goods and services can fall under:

• Exempt – where no VAT is charged on the supply. Examples of exempt items include the provision of insurance, postage stamps and health services provided by doctors. If a business only sells VAT-exempt goods and services, they cannot register for VAT.
• Supplies that are 'outside the scope' of the UK VAT system altogether. These supplies are beyond the realm of the UK VAT system, and you cannot charge or reclaim VAT on these supplies. Examples include goods or services you buy and use outside of the UK, statutory fees (such as the London Congestion Charge) and goods you sell as part of a hobby.

If a business has made an error in charging VAT, then this needs to be corrected. The timing and amount of an error can impact on how the issue is resolved.

There are also penalties if you charge VAT to your customers before you are officially VAT registered. VAT registration is only required for eligible businesses earning more than £90,000 per year although businesses under the threshold can voluntarily apply for a VAT registration.

VAT – digital record keeping

HMRC requires businesses to maintain accurate VAT records to ensure correct tax payments. While all businesses must retain general records (such as invoices, bank statements, and receipts), a key requirement under the Making Tax Digital for VAT initiative is keeping specific VAT records digitally.

Businesses must maintain digital records of VAT charged and paid, including:

• The VAT on all goods and services that are sold (supplies made) and purchased (supplies received).
• The time and value of each supply (excluding VAT).
• Any adjustments made to VAT returns.
• Reverse charge transactions.
• VAT accounting schemes used.
• Daily gross takings when using a retail scheme.
• Items where VAT has been reclaimed for Flat Rate Scheme users.
• Total sales and VAT on those sales for those trading in gold and using the Gold Accounting Scheme.

Digital records must be kept using compatible software or spreadsheets that can connect directly with HMRC systems. Where multiple software tools are used, they must be linked digitally, manual transfer of data or ‘copy and paste’ is not allowed. Digital links can include formulas in spreadsheets, imports/exports of XML or CSV files, or uploading/downloading data.

Businesses must start keeping records from the moment they register for VAT and retain them for at least 6 years (10 years if using certain VAT schemes). Exemptions apply only to specific entities, like government departments or those eligible for an exemption from keeping digital records.

VAT relief for the disabled

VAT relief is available on goods and services for people with long-term illnesses or disabilities. 

There are special VAT reliefs available for certain people living with disabilities or long-term illnesses. These reliefs are generally available on certain products and services designed specifically for their personal or domestic use. This VAT relief covers not only the product itself but also installation, repairs, maintenance as well as related spare parts and accessories.

Eligible items typically include adjustable beds, stair lifts, wheelchairs, medical aids, low vision aids (excluding glasses or contact lenses) and home building works such as ramps, widened doorways or lifts. Motor vehicles purchased or leased through the Motability scheme may also qualify.

To benefit from this relief, the individual must meet HMRC’s criteria which usually covers those with a long-term physical or mental condition affecting daily life, chronic illnesses such as diabetes or terminal conditions. Age criteria alone, or temporary disabilities, do not qualify.

Buyers must provide a written declaration confirming their eligibility. Most suppliers will provide a standard form for this purpose.

For imported items, qualifying goods for personal use can benefit from VAT relief if they are properly declared.

Local councils may also offer support or funding for necessary home adaptations, helping ensure greater independence and quality of life for disabled individuals.

Using the VAT Cash Accounting Scheme

Struggling with late-paying customers? The VAT Cash Accounting Scheme helps protect cash flow by taxing only what you have received.

The VAT Cash Accounting Scheme is designed to support businesses by improving cash flow. Using this scheme means that VAT is only paid when your customer pays you and not when you issue an invoice. This means that if a customer fails to pay, the VAT is not payable to HMRC, offering a clear advantage for businesses that sell on credit.

In contrast, under standard VAT accounting, VAT is due whether or not you've been paid, which can create financial pressure if your customer is late in paying or does not pay.

To join the scheme, a business must have a VAT taxable turnover of £1.35 million or less in the next 12 months. Once in the scheme, a business can continue using it until their turnover exceeds £1.6 million.

You cannot use the Cash Accounting Scheme if:

• You are behind on VAT returns or payments.
• You have committed a VAT offence in the last 12 months.
• You are using the Flat Rate Scheme, which has its own method for handling VAT on a cash basis.

There’s no formal application required. You can start using the scheme:

• At the beginning of any VAT accounting period, or
• From the start of VAT registration, if you’re newly registered.

You can leave the scheme voluntarily at the end of any VAT period without notifying HMRC and rejoin again if you continue to meet the eligibility criteria.

VAT Annual Accounting

Streamline your VAT reporting with fewer returns and smoother cash flow. The Annual Accounting Scheme makes VAT easier to manage for eligible small businesses.

The VAT Annual Accounting Scheme is designed to simplify VAT reporting for smaller businesses with an annual taxable turnover of up to £1.35 million. One of the main advantages of the scheme is that it requires businesses to submit only one VAT return per year, significantly reducing the administrative time and costs typically associated with preparing and filing quarterly returns.

Helping to meet the needs of small businesses, the scheme can be used alongside either the VAT Flat Rate Scheme or standard VAT accounting. It also allows for regular interim VAT payments throughout the year, helping businesses smooth out their cash flow and avoid large, unexpected VAT bills.

To be eligible to join the scheme, a business must be solvent, new to the scheme, and up to date with all VAT payments. However, it cannot be a division of a larger company or part of a VAT group.

Once enrolled, a business will make interim payments based on the previous year’s VAT liability. For newly VAT-registered businesses, these payments are calculated using an estimated annual VAT liability. At the end of the 12-month VAT accounting period, a final balancing payment is made when the annual VAT return is submitted. This final return can often be completed in tandem with the business’s annual accounts, streamlining year-end reporting.

The final balancing payment must be submitted within two months of the end of the accounting period. Businesses can continue to use the scheme provided their taxable supplies remain below £1.6 million and they continue to meet the scheme’s other eligibility requirements.

VAT exempt supplies

Not all VAT-free sales are the same. Understanding the key difference between zero-rated and VAT-exempt supplies could save your business money and prevent costly VAT mistakes.

It's important to understand the distinction between zero-rated and VAT-exempt supplies. While both may appear similar, because no VAT is charged on the sale, the implications for businesses are very different.

If a supply is exempt from VAT, it means no VAT is charged to the customer, and no output VAT is due. However, the downside for businesses is that they cannot reclaim any input VAT (i.e., VAT paid on purchases or expenses related to the exempt activity). This can make exempt activities more expensive to provide, particularly for businesses that incur significant VAT on costs.

Common examples of VAT-exempt supplies include:

• Insurance
• Finance and credit
• Education and training
• Fundraising events run by charities
• Health and welfare services
• Postal services
• Betting and gaming
• Subscriptions to membership organisations
• Selling, leasing, and letting of commercial land and buildings (though this exemption can be waived under certain conditions)

There are exceptions and detailed rules in most of these examples cited above. Whether a supply qualifies as being VAT exempt may depend on how it's structured and who is receiving the service.