Lower rate applies to a small range of supplies, including domestic fuel and power and some conversions of residential property.
Zero rate applies to a range of supplies, including some types of food, hard-copy books and newspapers (not electronic), new houses and children’s clothes. VAT is charged at a zero rate to the customer, but the supplier can recover VAT on costs.
Exempt supplies include many land-related supplies, insurance, finance, education,health and welfare, and non-profit sports clubs. No VAT is charged to the customer, but the supplier can’t recover VAT on costs.
Registration – turnover for last 12 months
Deregistration – turnover next 12 months
An unregistered business must register for VAT if it has made taxable supplies that equal or exceed the registration threshold in the last 12 months, up to any month-end, or if it expects to exceed that threshold in the next 30 days alone. Taxable supplies include reduced rate and zero-rated sales.
A VAT-registered business can apply to deregister if it can satisfy HMRC that taxable supplies in the next year will not exceed the deregistration threshold.
Most VAT returns are prepared for three-month periods, and must be filed electronically within seven days of the end of the month following the return period.
Payment of VAT must be made electronically, and must be received by HMRC by the same deadline as the return or be paid by direct debit.
If you supply automated digital or broadcasting services to non businesses in other EU countries, you must charge VAT at the rate that applies where the customer belongs. The overseas VAT must be charged on any amount of sales, even if you are not VAT-registered in the UK.
To charge overseas VAT you must either register for VAT in the customer’s country or register through HMRC’s VAT-MOSS system.
Small business schemes
Flat-rate scheme (FRS)
When using FRS, the VAT paid to HMRC by the business is a fixed percentage (based on business category) of ‘FRS turnover’ rather than the net of output tax over input tax.
Businesses in first year of VAT registration are entitled to a 1% discount on the normal FRS percentage for their business category.
Under FRS, input VAT is not recoverable, unless it relates to the purchase of a capital asset costing £2,000 or more (including VAT).
Under annual accounting, the business files a single VAT return each year instead of one every three months.
When using the cash accounting scheme, the business only pays VAT to HMRC when its customers have paid the business, but it can only recover VAT on expenses actually paid for, rather than accrued.