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VAT: What you need to know

VAT in 2020: What you need to know

VAT Post Brexit

As a UK business owner, it’s essential to understand the new UK-EU Trade and Cooperation Agreement that was agreed on 24 December 2020. This marked a huge shift in VAT compliance, with big changes for both business-to-business (B2B) and business-to-consumer (B2C) supplies of services from the UK to the EU.

 

Take B2B supply of services as an example. Now, these are outside the scope of UK VAT and customers in the relevant EU member state must self-account for VAT under the ‘reverse charge’ mechanism via their VAT return. In contrast, B2C supply of services is subject to UK VAT but special rules may apply depending on the type of supply – including legal services.

 

It’s also worth noting that, from 1 January 2021, the UK government introduced postponed accounting for import VAT on goods brought into the UK – regardless of whether those goods originated from the EU or not. As such, any overseas businesses sending parcels to the UK will need to be aware that their goods could be liable for VAT. Plus, exporters must remember that import VAT and customs processes will likely apply to items entering the EU too.

 

For digital service providers, there are additional considerations. If you’re supplying non-business customers in the EU, the ‘place of supply’ remains where the customer resides. The same goes for insurance and financial services; firms can now reclaim input VAT related to certain products. Additionally, companies selling digital services to consumers in the EU who want to keep using the MOSS system need to register for the VAT MOSS non-Union scheme in an EU member state.

 

Finally, don’t forget that UK businesses can still claim refunds of VAT from EU member states – they just have to use different processes than before.

 

To sum up, understanding the UK-EU Trade and Cooperation Agreement is key for ensuring your legal practice stays compliant and up-to-date with all the latest changes to VAT compliance. And if you ever have any questions, consulting a professional can provide peace of mind and make sure you stay within the law. For example, one law firm recently helped a client navigate the complexities of the new VAT regulations, ensuring they remained tax compliant without any headaches!

What is VAT?

VAT, or Value Added Tax, is levied on the sale of goods and services in the UK. It is a type of consumption tax” because it is charged on items that people buy and is also an indirect tax” because it is collected by businesses on behalf of the Government. The pros and cons of being vat registered can be seen here.

What are the current VAT rates in the UK?

The standard rate of VAT in the UK is currently 20% and this is the rate charged on most purchases. There are other VAT rates which you need to be aware of as a small business, which we cover in detail below. EU law dictates that the standard rate of VAT in EU states should not be lower than 15%.

Snapshot of UK VAT rates

Reduced rate VAT: Charged at 5% -?Sanitary products, energy saving measures and children’s car seats.

The zero rate:?Charged at 0% -“Most food, books, newspapers and children’s clothes. Even though no VAT is charged, the sale of zero rate goods and services has to be recorded and reported on your VAT return.

VAT exempt?: Charged at 0% – Postage stamps and financial and property transactions. The sale of these goods and services still need to be counted in your taxable turnover.

How has the VAT rate changed

VAT was introduced in 1973, replacing the Purchase Tax, which applied when goods and services were produced and distributed not when they were sold. Purchase Tax had a different rate for different types of goods.

The standard rate of VAT has changed over time, raised or lowered by the Government depending on the needs of the economy.

YearStandard rate of VAT
1973-7410%
1974-798%
1979-9115%
1991-200817.5%
2008-0915%
2009-1117.5%
2011-present20%

Who pays VAT?

Businesses charge their customers VAT but must then pay this to HMRC when they file their VAT return. Businesses with a turnover of more than ?85,000 must register to pay and charge VAT on the products and services they buy and sell. Other businesses can choose to register for VAT voluntarily.

How do you pay VAT?

HMRC can accept VAT payments in a number of different ways.

  • Using?Faster Payments?on the phone or online – Same day or next day payments
  • By CHAPS?using an online form?- Same day or next day payments
  • Direct debit – Up to 3 working days
  • BACS – Up to 3 working days
  • Standing order (for some VAT schemes)?- Up to 3 working days
  • Debit or credit card – Up to 3 working days
  • At a bank or building society?- Up to 3 working days

Read the ?Pay your VAT bill?‘section of the Government’s website for more information.

How to charge VAT

VAT is an indirect tax, collected by businesses on behalf of the Government, which means that this cost needs to be added on top of the amount charged to customers for goods or services at the point of sale.

Invoices need to include:

  • An invoice number
  • The invoice date (and the date the goods and services were supplied if this is different to the invoice date)
  • The name and address of your business
  • Your VAT registration number
  • The customer’s name and address
  • A description of the goods and services covered

Each item on your invoice should clearly state:

  • The unit price excluding VAT
  • The quantity
  • The VAT rate
  • The total to pay excluding VAT
  • The amount of VAT to pay
  • Any cash discount

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