Category: Value Added Tax

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.

VAT – advantages of the VAT Flat Rate Scheme

Small business? The VAT Flat Rate Scheme could cut paperwork and improve cash flow. Pay VAT as a set percentage of turnover and enjoy simpler admin, budgeting ease, and even a 1% discount in year one of your registration for VAT.

The VAT Flat Rate Scheme is designed to simplify the process of VAT accounting for small businesses. Rather than calculating VAT on every sale and purchase, eligible businesses pay VAT as a fixed percentage of their turnover including VAT. The percentage applied depends on the type of business activity and is set by HMRC.

This scheme helps reduce the complexity of VAT compliance by minimising the need for detailed calculations and record-keeping of input VAT on purchases.

To join the scheme, a business must expect its annual taxable turnover (excluding VAT) to be no more than £150,000 in the next 12 months.

The advantages of the VAT Flat Rate Scheme include the following:

1. Simplified VAT Administration
   You don’t need to calculate VAT on every sale or claim back VAT on most purchases, which greatly reduces the time and effort involved in VAT reporting.
2. Predictability of VAT Payments
   Knowing your flat rate percentage makes it easier to predict and budget for VAT payments, enhancing cash flow management.
3. Potential Financial Savings
   If your business has relatively low VATable expenses, you may pay less VAT overall under the scheme compared to the standard VAT accounting method.
4. Ideal for Service-Based Businesses
   Businesses with few goods purchases—such as consultants, IT professionals, and freelancers often benefit especially if they don't fall into the limited cost trader category.
5. 1% First-Year Discount
   The introductory discount provides a temporary boost to cash flow, particularly useful for new or growing businesses.

The scheme can be a valuable option for small businesses looking to simplify VAT reporting and reduce administrative workload. However, its suitability should be carefully assessed and regularly reviewed to ensure it remains beneficial as a business grows or its circumstances change.

When can you deregister for VAT?

Considering VAT deregistration? Whether compulsory or voluntary, knowing the rules, deadlines and risks of delay can save your business from costly penalties.

The decision to deregister for VAT may be necessary or beneficial in a range of circumstances. Whether it's a legal requirement or a voluntary decision, it’s important for businesses to understand the rules and deadlines to avoid penalties and ensure proper compliance. The rules differ depending on whether the deregistration is compulsory or voluntary.

You must cancel your VAT registration if your business is no longer eligible. This typically applies when a business:

• Stops making taxable supplies
• Sells the business
• Changes its legal structure (e.g., from sole trader to limited company)
• Disbands a VAT group
• Joins an existing VAT group
• Joins the Agricultural Flat Rate Scheme

In these cases, deregistration must be completed within 30 days of the change. Failure to do so may result in penalties. In some situations, it may be possible to retain the same VAT number, particularly where the business continues in a different form.

A business may also apply for voluntary deregistration if it expects its taxable turnover to remain below the current threshold of £88,000. HMRC may request supporting evidence to confirm that the turnover will stay below this level. It's important to note that voluntary deregistration cannot be backdated—the cancellation will only take effect from the date the request is received or a future date agreed with HMRC.

Even after deregistering, a business can still make late input tax claims on services received while it was VAT registered, as long as the claims fall within the standard VAT time limits.

Changes to VAT on donations to charities

The government is consulting on new VAT relief for goods donated to charities for free use. Could this fix an unfair gap in current rules? Have your say by 21 July 2025.

A new joint consultation from HM Treasury and HMRC, titled “VAT Treatment of Business Donations of Goods to Charity” has been launched. The consultation seeks to gather views on introducing a VAT relief for goods donated to charities by companies to give away free of charge or to use in the delivery of their services. The consultation is open until 21 July 2025.

Currently, VAT relief applies to goods donated to charity for resale (such as in charity shops), but not to those given away free of charge or used directly in charitable services. The government acknowledges that this creates an inconsistency. While the existing rules were originally designed to prevent VAT fraud, the consultation explores options for better alignment without weakening fraud safeguards.

The consultation is split in to four main sections:

1. To gather information about respondents and their experiences with donating or receiving goods.
2. To examine current VAT rules on donated goods used for charitable distribution or service delivery.
3. To set out the government's aims and proposes the scope of a new VAT relief.
4. To explore options for administering the relief and seek feedback on proportionate administrative arrangements.

The government encourages responses from all stakeholders, including charities, social enterprises, manufacturers, retailers, logistics providers, and industry bodies.