What is VAT and who must register?
Value Added Tax (VAT) is a consumption tax applied to most goods and services in the UK. Businesses must register for VAT if their VAT taxable turnover exceeds £90,000 in a 12-month period [1]. Voluntary registration is also possible for businesses with turnover below this threshold [1]. Once registered, you must charge VAT on your sales and can reclaim VAT on your business purchases [1].
Standard, reduced, and zero rates explained
The UK has three main VAT rates: the standard rate of 20%, the reduced rate of 5%, and the zero rate of 0% [1]. The standard rate applies to most goods and services. The reduced rate applies to certain items such as children's car seats and domestic fuel. The zero rate applies to items like most food, children's clothing, and books [1]. Exports to non-UK customers are also zero-rated [2].
How to calculate VAT on a price (including and excluding VAT)
To calculate the price including VAT at the standard rate (20%), multiply the price excluding VAT by 1.2. For example, if a chair costs £60 excluding VAT, the price including VAT is £60 x 1.2 = £72 [3]. For the reduced rate (5%), multiply by 1.05. For example, a child's car seat at £200 excluding VAT becomes £200 x 1.05 = £210 including VAT [3].
To calculate the price excluding VAT from a price that includes VAT at 20%, divide by 1.2. For instance, if a table costs £180 including VAT, the price excluding VAT is £180 ÷ 1.2 = £150. The VAT amount is £180 - £150 = £30 [3].
How to calculate VAT on sales and purchases
When you make a sale, you charge VAT on the selling price (output VAT). When you make a purchase, you pay VAT on the cost (input VAT). The difference between output VAT and input VAT is what you owe HMRC (or can reclaim) [1]. For example, if you charged £200 in output VAT and paid £150 in input VAT, you owe HMRC £50. If input VAT exceeds output VAT, you can reclaim the difference [1].
VAT on dental services: what is exempt?
Most dental services provided by registered dentists are exempt from VAT. This includes routine check-ups, fillings, extractions, and other treatments. However, certain services such as cosmetic dentistry (e.g., teeth whitening) may be subject to VAT at the standard rate. It is important to check the specific treatment to determine if VAT applies.
Common VAT calculation mistakes to avoid
Common mistakes include applying the wrong VAT rate, miscalculating the VAT fraction when working backwards from a VAT-inclusive price, and failing to account for VAT on mixed supplies (e.g., a product that includes both standard-rated and zero-rated components). Another frequent error is not keeping proper records of input VAT claimed, which can lead to HMRC penalties [4].
VAT return and payment deadlines
VAT-registered businesses must submit a VAT return to HMRC usually every three months [1]. The return must be submitted online, and any VAT due must be paid by the deadline, which is typically one calendar month and seven days after the end of the VAT period. For example, for the period ending 31 March, the deadline is 7 May. Late submission or payment can result in penalties [1].
Sources
- gov.uk: How VAT works: Overview - GOV.UK
- accaglobal.com: The VAT calculation for export of goods | ACCA Global
- aka.hmrc.gov.uk: Charge, reclaim and record VAT - GOV.UK
- icaew.com: VAT | Tax - ICAEW.com