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Company Formation Home Page >> Incorporating a Business in England, Wales and Scotland >> What is VAT? Expert Advice on VAT RegistrationWHAT IS VAT? Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man. Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services. It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer. It is not a charge on companies. It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally, via a system of deductions whereby taxable persons (i.e., VAT-registered businesses) can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved. If you wish to register for VAT, a VAT registration form needs to be completed. We can provide all of the necessary assistance to complete this form efficiently and accurately. We can also advise you with regard to supporting documentation, such as copy invoices and contracts, that you may need to submit to HM Customs with your registration form. Specialised UK VAT registrations for non-UK businesses: the requirement to register for VAT is determined mainly by your business trade and not necessarily the country where your business resides. You may be required to register your company for VAT because you have draw down stock in the UK, or trade over the Internet. We can help you to register and can assist with the preparation and submission of your VAT Returns. If you are a UK business and you travel to another European Union member country on business, you may be entitled to recover VAT on some of your expenditure. Each European country has different rules about which expenses are recoverable and the rules can be complex. We can assist you to assess any VAT refunds and can compile and submit these claims to the relevant tax authority.
 UK VAT Registrations » Application for VAT Registration in UK  - £150.00 | For final VAT application questionnaire - you will receive this document within 10-14 days once your online VAT application submitted to the HM Revenue & Customs. To complete such questionnaire you need to provide the following information about your company: business phone number, business address (except of registered address), business fax number, business banking account details, number of employers. You also will need to provide information where your company is doing business, as well as few incoming and outgoing invoices (from/for behalf of your company).
The following three factors play a part in determining whether or not you need to register:
Taxable Supplies. The supply of any goods and services which are subject to VAT at any rate, including zero-rated, are called taxable supplies. Distance Sales. Distance selling is when a taxable person in one European Community (EC) Member State supplies and delivers goods to a customer in another EC Member State and the customer is not: registered for VAT, or liable to be registered for VAT. The most common example of distance sales is mail order sales. Acquisitions. If you are an organisation or business, and not a private individual acting in a purely personal capacity, any goods you buy from a VAT registered supplier in another EC country for removal to the UK are known as acquisitions.
If: your taxable supplies, distance sales, or acquisitions are expected to exceed £60,000 in the next 30 days, or if you are already trading, and they have exceeded ?60,000 in the past 12 months, or, if you have taken over a VAT registered business as a going concern... Then: you must notify your Customs and Excise local VAT office immediately of liability to register for VAT. If: your taxable supplies, distance sales, or acquisitions are not expected to exceed £60,000 in the next 30 days, and have not exceeded £60,000 in the past 12 months... Then: VAT registration is not necessary in these circumstances although businesses can register for VAT on a voluntary basis to be able to reclaim VAT on purchases.
Voluntary Registration. You can apply to HM Customs and Excise for voluntary registration, even if your turnover is not at the required level. Why would you want to do this and subject yourself to the necessary record keeping and form filling? Well it could save you a lot of money. If you are registered for VAT, it means that you can reclaim the VAT on all your VAT purchases. This will save you 17,5% on most purchases. You must, however, add VAT to all your UK sales. This increases your prices by 17,5%. The decision to register rests on the nature of your client base. If the majority of your clients are VAT registered, then it is likely that you will be better off if you register. VAT registered clients merely reclaim the VAT in the same way that you do on your purchases and are therefore no worse off. However, if your clients are not businesses but individuals, then it will effectively put up your prices. If you are reading this site, then I assume that you are, or plan to be, an editorial photographer and your clients will be VAT registered. You must keep records of all supplies you make and receive and a summary of each VAT Period. Records must be kept for six years.
Important VAT Requirements. When your company becomes VAT registered you must comply with the VAT regulations that affect your business. It is beyond the scope of this guide to provide a full analysis of the VAT regulations that affect a given business however here are a few of the key requirements:
When you sell goods or services that incorporate a VAT charge you must supply your customer with a VAT invoice. Generally the VAT invoice should include the VAT amount paid, your companies VAT registration number, a unique invoice number and the date the invoice was raised.
You must retain all VAT records including invoices and receipts for a 6 year period. These may be required by law. Remember that a VAT receipt for a purchase you have made through your business is a right to claim back the VAT paid, without this you legally have no right to claim back the VAT.
You must notify HM Revenue and Customs within 30 days if any of the details for your company change.
You must charge VAT on supplies made to the company's employees or inter-company transactions.
You should not claim back VAT on personal expenses.
Tax Invoice/Sales. When you make a supply you must issue a tax invoice within 30 days. It must include the following: An identifying number. This must be unique. we would suggest you are systematic in this. E.g. first two digits Year, second two digits month, third two digits sequence. Your first Invoice for September 2005 would therefore be – 01/09/05 and then so on. Providing you don't stay in business for more than a hundred years all your numbers will be unique.
Your name, address and VAT registration number.
Time of supply.
Date of issue.
Your customer’s name and address.
Type of supply.
A description of the goods/service supplied.
For each description:
Quantity of goods or extent of the services.
Charge made, excluding VAT.
Rate of VAT.
Total charges made, excluding VAT.
Each rate of VAT charged and amounts charged at each rate.
Rate of any cash discount offered.
Total VAT payable.
UK VAT Registrations » Application for VAT Registration in UK - £150.00 | For final VAT application questionnaire - you will receive this document within 10-14 days once your online VAT application submitted to the HM Revenue & Customs. To complete such questionnaire you need to provide the following information about your company: business phone number, business address (except of registered address), business fax number, business banking account details, number of employers. You also will need to provide information where your company is doing business, as well as few incoming and outgoing invoices (from/for behalf of your company).
 The Top VAT Tips. Be clear about the impact of VAT on growing your business turnover. Make sure your business plan looks at how you will deal with the impact of registering for VAT. For example, if you provide services to members of the public, registering for VAT may have major implications for your pricing structure. If you do register for VAT, Customs wants to work with you to help make the process as simple as possible. Monitor your turnover so that you know when you are approaching the VAT registration threshold. Apply to register in plenty of time so that you have your VAT number when you need it. There are a number of schemes to make dealing with VAT easier. For example, the "cash accounting" scheme means that you only pay the VAT to Customs after your customer has paid you. The "Flat Rate Scheme" can help reduce the time spent on VAT bookkeeping. When you register always ask what schemes are available to make paying your VAT easier.
Always keep your books up-to-date and check accounting documents. Good book keeping is a vital part of good overall business management. It's always better to spend those few extra minutes each day writing things up and filing then properly, rather than sorting out piles of documents at once. Always check documents you receive, for example, you must have a "VAT invoice" to claim back VAT - a "statement" is not a proper invoice. Always enter cash receipts in your books before using the cash to make purchases. Don't worry if Customs make contact with you. Following these top ten tips you will help you get things right, meaning you need not worry about your VAT affairs. Consequently you should not worry if Customs make contact with you. Customs do contact businesses from time to time and they may want to visit your business. Don't be concerned if Customs visit you, they will tell you why they want to visit and what information they will want to see.
It is also charged on goods, and some services, imported from places outside the European Union and on goods and some services coming into the UK from the other EU countries. All goods and services that are VAT rated are called 'taxable supplies'. You must charge VAT on your taxable supplies from the date you first need to be registered. The value of these supplies is called your 'taxable turnover'.
Some examples of taxable supplies:
selling new and used goods, including hire purchase
renting and hiring out goods
using business stock for private purposes
providing a service, for example hairdressing or decorating and
charging admission to enter into buildings.
If you are VAT registered, you will charge VAT on many goods and services you supply to customers in the UK and Isle of Man. VAT does not apply to certain services because the law says these are 'exempt' from VAT. These include loans of money, some property transactions, insurance and certain types of education and training. Supplies that are exempt from VAT do not form part of your taxable turnover. Download Forms:
Should I be Registered for VAT?
VAT 1 Application for VAT registration
VAT 1 Application for Registration Worked Example (Corporate Body)
Application for VAT Registration Worked Example (Corporate Body)
Form VAT 1A
Flat Rate Scheme for Small Businesses
Place of Supply of Services
VAT Form for Appointment of a Tax Representative
Businesses that are registered for VAT will normally receive a VAT Return (Form VAT 100) each quarter. The Return asks for details of what the company has bought and sold in that period (the tax period). The company must pay any tax owed (or claim repayment if a rebate is owed). The VAT Return and any tax owed must reach HM Customs and Excise ("Customs") by the date shown on the Return. This is known as the due date. It is possible to arrange tax periods to fit in with the company's financial year by writing to the VAT office with Form VAT 1. Payment and accounting for VAT is monitored by VAT Central Unit (VCU). Payment of VAT due can be made by cheque, postal order or credit transfer.
Live Help » Live Help is a real time "chat" feature which enables you to interact with a customer service representative without a phone call. Get answers to your questions while using our website. Clicking the "Live Help" button will start an on-line session with one of our representatives. Live Help is currently available during normal business hours. Outside of the above opening hours our business center will be closed. When you click on the button you will see an e-mail form that will allow you to send us a mail with your questions. Live Help is absolutely free! There are no hidden fees. We offer the service as a courtesy to our website visitors. Besides English, we have several customer service representatives who speak Spanish, German, Franch, Polish and Russian. Dear visitors, while having a chat session with a customer, we are frequently requested to give a piece of advice on tax planning or business structuring. We would like to inform you that it is against our principles to provide online advice pertaining to these issues. The points that may be covered during a session include service description, package or service price, navigation at our website, ways of making an order, methods of payment etc. Yet, if you wish us to provide you with advice on tax or business structuring, you should be aware that this service is chargeable. If you have any questions please E-Mail or call us: Call FREE 0800 081 1510, Overseas Residents: +44 845 020 4269 or +44 20 7748 3039, Fax: +44 20 7681 3318.
Cheques and postal orders should be made payable to HM Customs and Excise. Application to pay by credit transfer should be made through the local VAT office, which will supply the necessary forms. One of the benefits of paying by credit transfer is that an additional seven days is allowed for receipt of the Return and payment. Enquiries regarding Returns, payments or repayments should be addressed to the local VAT Business Advice Centre and not to the VCU. Companies which use annual accounting will need to set up a direct debit for payment of tax due. If there is any question of potential liability to a default surcharge, it is recommended that a certificate of posting is obtained from the Post Office to show that the Return and payment were posted in good time to reach Southend by the due date. In an emergency, payment may be made at the local VAT office, although this is not encouraged by Customs.
The VAT Return (Form VAT 100) contains a declaration that the information given is true and complete. Signing a Return knowing that it is false could result in a criminal prosecution. This would include understating output tax or overstating input tax by a significant amount. Before signing the Return therefore, it is advisable to check it carefully for completeness and accuracy. This check is often best carried out by someone who was not involved in preparing the Return. The signatory must be a responsible person (eg the proprietor, director, etc).
The form should be completed in ink, writing one amount (or "none") in each box. Negative figures should be in brackets. The Return should reflect all transactions recorded in the VAT account and any required annual adjustments should be declared. Mistakes should be corrected by crossing out the figure, writing in the correct figure and initialling the amendment. If payment is enclosed with the completed Return, ensure that the payment box has been ticked. Before sending the Return, check that it has been signed and dated.
The printed details on the Return should not be altered and nothing other than the required details should be written on the form. Only the Return and payment should be sent in the envelope provided - do not include other correspondence or cash. It is always advisable to keep a photocopy of the Return. If a Return cannot be completed because the exact amount of input or output tax is not known, permission to estimate the tax values may be obtained from the local VAT Business Advice Centre. This office will also supply a duplicate Return if the original has not been received or is mislaid.
When a person ceases to be registered a final VAT Return must be completed on Form VAT 193 (unless the registration number is reallocated to a person taking over the business as a going concern. The final Return is similar to the standard Return but requires details of VAT to be entered in respect of stocks and assets remaining in the business at the time the registration is cancelled.
Penalties are incurred for late payment, failing to register when required to do so, "misdeclaring" on the VAT Return, and evading payment of VAT due. Most penalties relating to VAT are applied automatically, so that a company's only recourse is through review or appeal to the VAT tribunal. A "reasonable excuse" may be pleaded but this does not generally include insufficient funds or reliance on a third party. It is always advisable to obtain a certificate of posting when sending the VAT Return as this will serve as evidence in the event of a late payment penalty being imposed.
If future payments due on Returns cannot be met, part payment by the due date will reduce the penalty, as it is based on the amount outstanding at the due date. Companies should arrange time to pay any existing debt over a period that is manageable within its forecast cash flow, taking into account any future Return payments due. This should help to avoid the trap of continually rising default surcharges, which could make it impossible for a company to extricate itself from an increasing arrears situation.
A company will usually only incur a penalty for failing to notify Customs of VAT liability if the time lapsed is more than two months - this is a policy decision rather than one of the Regulations. It is worth taking time to minimise the effect of the delay before making the notification. As the penalty is based on the tax due over the period of delay, any action that can be taken to reduce this will also reduce the penalty.
For example, the company may bring forward the intended purchase of assets, so that the input tax on them reduces the net VAT payable over the period of that delay, before making the notification. The company must ensure the receipt of payments during the delay does not increase the penalty due - perhaps by delaying receipts - and that the delay does not push the penalty into the next bracket (currently, up to 9 months, 5%; 9-18 months, 10%; over 18 months, 15%).
Reasonable excuses in these situations have included: negligence or misleading advice from a professional advisor; complexity regarding status of a taxable person (employed or self-employed); illness or death of proprietor, key employee or close relative and marriage breakdown.
An error on a VAT Return can result in a penalty, although this "misdeclaration penalty" can be avoided if the company identifies the error and notifies Customs. There are no reasonable grounds for appeal against a penalty imposed for evasion of VAT liability. The penalty may be mitigated or reduced (often to 25% or lower) depending on the co-operation of the company in assisting Customs to identify the means by which the fraud was carried out and the amount of VAT involved.
There are three rates of VAT in the UK:
17.5% (standard-rate)
5% (reduced rate) and
0% (zero-rate).
You will probably have to register for and charge VAT if:
your taxable turnover reaches or is likely to reach a set limit, known as the VAT registration threshold
you have taken over a business as a going concern or
you acquire goods from other European Union countries.
The current VAT registration threshold is £58,000. But you can opt to register for VAT if your taxable turnover is less than this, if what you do counts as a business for VAT purposes. Turnover is the amount of money going through the business, not just the profit.
Penalties are incurred for late payment, failing to register when required to do so, "misdeclaring" on the VAT Return, and evading payment of VAT due. Most penalties relating to VAT are applied automatically, so that a company's only recourse is through review or appeal to the VAT tribunal. A "reasonable excuse" may be pleaded but this does not generally include insufficient funds or reliance on a third party. It is always advisable to obtain a certificate of posting when sending the VAT Return as this will serve as evidence in the event of a late payment penalty being imposed. If future payments due on Returns cannot be met, part payment by the due date will reduce the penalty, as it is based on the amount outstanding at the due date. Companies should arrange time to pay any existing debt over a period that is manageable within its forecast cash flow, taking into account any future Return payments due. This should help to avoid the trap of continually rising default surcharges, which could make it impossible for a company to extricate itself from an increasing arrears situation. A company will usually only incur a penalty for failing to notify Customs of VAT liability if the time lapsed is more than two months - this is a policy decision rather than one of the Regulations. It is worth taking time to minimise the effect of the delay before making the notification. As the penalty is based on the tax due over the period of delay, any action that can be taken to reduce this will also reduce the penalty. For example, the company may bring forward the intended purchase of assets, so that the input tax on them reduces the net VAT payable over the period of that delay, before making the notification. The company must ensure the receipt of payments during the delay does not increase the penalty due - perhaps by delaying receipts - and that the delay does not push the penalty into the next bracket (currently, up to 9 months, 5%; 9-18 months, 10%; over 18 months, 15%).
Do I have to register for VAT? If you are in business and your taxable turnover, not just your profit, goes over the registration threshold you become a 'taxable person'. You must then register for VAT. If you don't register at the correct time you could be fined. You must register for VAT if: at the end of any month the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £58,000 and at any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold in the next thirty days alone.
These rules also apply when you take over a business as a going concern (see Notice 700/9 Transfer of a business as a going concern). It doesn't matter whether the last owner was registered: if the business is trading at a level above the limit then you'll need to register and your date of registration will be the day you take over the business.
To register for VAT you must complete Form VAT 1, which you must send to Customs and Excise within 30 days of any of the above.
What is taxable turnover? All goods and services which are liable to VAT at the standard, reduced or zero-rate are called 'taxable supplies', whether you are registered for VAT or not. The total value of these supplies is called your 'taxable turnover'. If you are in business and your taxable turnover reaches or is likely to reach the registration threshold you will probably have to register for VAT. You must charge VAT on your taxable supplies from the date you first need to be registered.
If you receive certain services from abroad, for example advertising, data processing, consultancy or legal, accounting or professional services, these will be treated as if you supplied them and you must include the value in your taxable turnover.
What are input tax and output tax? Input tax is the VAT that you pay out to your suppliers for goods and services that you purchase for your business. It is VAT on goods or services coming IN to your business. Input tax is the VAT that registered businesses can reclaim. Output tax is the term used to describe the VAT on your sales of goods or services. Output tax is the VAT on goods or services going OUT of the business. Output tax is the VAT you collect from your customers on each sale that you make.
Why would I want to register for VAT if my taxable turnover is below the threshold? If your taxable turnover is below the registration threshold you can apply for 'voluntary registration', if you can prove that what you do is a business for VAT purposes. There are advantages and disadvantages to registering voluntarily. Before you apply weigh up carefully whether it will benefit you.
Benefits include increased credibility for your business and, if your business makes standard or zero-rated supplies, you'll be able to claim back input tax. However, once registered for VAT, you'll have to:
account for output tax on all your taxable supplies
keep proper VAT records and accounts and
send in VAT returns regularly.
What are the exceptions? No VAT is charged on taxable supplies made by a business which is not, and is not required to be, registered for VAT. These are known as 'outside the scope' supplies. VAT does not apply to certain services because the law says these are 'exempt' from VAT. These include loans of money, insurance, certain types of education and training and some property transactions (selling, leasing and letting land and buildings, but not garages, parking spaces, hotel or holiday accommodation).
Supplies that are exempt from VAT do not form part of your taxable turnover. If the only services you supply are exempt supplies, you can't normally be registered for VAT. If you are registered for VAT and have some exempt supplies you may not be able to get all your input tax back.
What if all my goods are zero-rated? If you only supply goods that are zero-rated, you may not have to register for VAT even if your taxable turnover goes above the registration threshold, but you do have to tell C&E first and apply to be 'exempt from registration'.
I'm a small business - is there anything that will make VAT simpler? There are a number of simplified arrangements to make VAT accounting easier for small businesses:
Cash accounting. If your taxable turnover is under £660,000 a year you can arrange to account to Customs for VAT on the basis of cash received and paid, rather than the invoice date or time of supply.
Annual accounting. Most businesses work on quarterly VAT periods and send in four VAT returns every year. However, if your turnover is under £660,000 you can join the annual accounting scheme and send in just one return a year. If you use the scheme you do have to make regular payments throughout the year. This can help financial planning and cash flow.
Retail schemes. If you are a retailer there are schemes, which offer you an alternative if it's impractical for you to issue invoices for a large number of supplies direct to the public.
Bad debt relief. If you make supplies of goods or services to a customer but you are not paid you may be able to claim relief from VAT on the debts.
Flat rate scheme. You're likely to be eligible if your turnover is under £150,000. This new flat-rate scheme was introduced in the 2002 Budget. It lets you save on administration because you don't have to account internally for VAT on each individual "in and out". You just pay over a set percentage of your total turnover. The rate depends on your business type.
What records must I keep for VAT purposes? You must keep:
a record of all standard-rated goods and services you receive or supply as part of your business
separate record of any exempt supplies you make and
a VAT account.
You must also keep a record of all zero-rated goods and services you receive or supply as part of your business. You don't have to keep these records in any particular way, but they need to be complete, up to date and the figures you use to fill in your VAT return must be easy to find.
What is a VAT account? This is simply a summary of the totals of your output and input tax. You should add up the VAT in your records and transfer the totals to your VAT account under separate headings for VAT deductible (input tax) and VAT payable (output tax). You can then use this information to help you complete your VAT return at the end of each accounting period.
What about invoices? Whenever you supply standard-rated goods or services to another VAT registered person, you need to give them a document showing certain information about what you are supplying. The document is called a VAT invoice. Normally you must issue a VAT invoice within 30 days of the date you make the supply.
Invoices are important for both you and the people you do business with. You may be able to reclaim the VAT your suppliers have charged you on goods and services for business but only if you keep all the VAT invoices you receive. In the same way if your customers are registered for VAT they may be able to reclaim the VAT you have charged them if they have an invoice from you.
Can I keep my records on computer? Yes, but you must make sure that you meet your legal obligations to:
account for VAT properly
provide information to us when we come to see you and
keep records in the required detail for the required length of time.
How long do I need to keep records? You must keep all your business records for at least 6 years. If the 6 year rule causes you serious storage problems or undue expense we may allow you to keep some of your records for a shorter period. You should contact our National Advice Service on 0845 010 9000 for further information about this.
What is distance selling? Distance selling occurs when a taxable person in one EC Member State (Member State of origin) supplies and delivers goods to a non-taxable person in another EC Member State (Member State of destination). The most common type of distance selling occurs through mail order transactions. A non-taxable customer may be a private individual, public body, charity or any business which is too small to register or whose activities are totally exempt. It is important to note that distance selling can only occur between Member States, so that mail order sales to the UK from outside the VAT territory, for instance from the Channel Islands, are not distance sales.
How does distance selling work? When a business established in another Member State exceeds the distance-selling threshold in the UK, they become liable to be registered here. Once registration is effected, all distance sales to the UK are taxed here.
How do I account for distance sales? The threshold limit is based on sales made during a calendar year from 1 January to 31 December. Taxable persons must keep records showing the value of their distance sales to each Member State, and must notify the fiscal authorities in the relevant State once their particular threshold has been reached. Under UK law, a liability to register for UK VAT arises from the day that sales exceed our threshold.
What if I make distance sales to more than one Member State? Distance sales are usually taxed in the member state of origin until you exceed the distance selling threshold of the destination member state, you will then be required to register with the member state in question.
What if a distance sale involves excise goods? There is no threshold where sales involve goods subject to excise duty. Such goods are always taxed in the country of destination. An EC supplier who arranges the delivery of excise goods to a non-VAT registered customer in the UK must register here when the normal registration turnover (currently £48,000) is reached and account for UK VAT as necessary.
Can I register before I reach the threshold? Where a person is making distance sales to the UK, they may elect to have such sales taxed in the UK before they reach the distance-selling threshold, by opting to make the place of supply the UK. You can register at any time before your sales reach the UK VAT distance selling threshold.
Can I register before I start making distance sales? Where a person is not yet making any distance sales to the UK but has either opted or intends to opt to make the place of supply the UK, there will be an entitlement to register on an intending trader basis. The applicant must provide written evidence to show that they have notified the fiscal authority in their home State that they have exercised an option to make the place of supply the UK.
What if I do not have a UK business establishment? Distance sales made by an individual are usually taxed in the member State of origin until the total value of supplies to the member State of destination exceeds the latter's distance selling threshold. Each member State can set it's own threshold within parameters laid down in European legislation. The UK threshold for distance sales, as laid down in the VAT Act 1994 Schedule 2 paragraph 1, is £70,000.
When a business established in another member State exceeds the distance selling threshold in the UK, they become liable to be registered here. Once registration is effected, all distance sales to the UK are taxed here. The threshold limit is based on sales made during a calendar year from 1 January to 31 December. A liability to register for UK VAT arises from the day that sales exceed the threshold.
Under what circumstances may I be asked to appoint a tax representative? You may need to appoint a tax representative if you are someone who is not normally resident in the UK, has no business establishment here and, in the case of a limited company, is not incorporated here. You will need to complete form VAT1TR in order to appoint a tax representative. More information about tax representatives can be found in Notice 700/1 Should I be Registered for VAT?
How will my registration date be decided? If you need to register because the value of your distance sales in the year or part year from January 1 exceeded the distance sales threshold, your registration date will be the date your sales exceeded the threshold.
When do I need to notify you of my liability to be registered? You must send your completed VAT1(A) form within 30 days of the date your distance sales exceeded the threshold.
When am I liable to become registered? You are liable to register if at any time during the calendar year from 1st January your total distance sales exceed the distance sales threshold. VAT AND EU: The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union.
Value added tax is:
a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.
a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.
charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.
What is a taxable person? For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business. However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales.
How is it charged? The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. Therefore, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage. Registered VAT traders are given a number and have to show the VAT charged to customers on invoices. In this way, the customer, if he is a registered trader, knows how much he can deduct in turn and the consumer knows how much tax he has paid on the final product. In this way the correct VAT is paid in stages and to a degree the system is self-policing. The system operates as follows:
Example
Stage 1. A mine sells iron ore to a smelter. The sale is worth €1000 and, if the VAT rate is 20%, the mine charges its customers €1200. It should pay €200 to the treasury, but as it has bought €240 worth of tools in the same accounting period, including €40 VAT, it is only required to pay €160 (€200 less €40) to the treasury. The treasury also receives the €40 and now gets €160 making €200 - which is the correct amount of VAT due on the sale of the iron ore.
Supply: €1000
VAT on supply: €200
VAT on purchases: €40
Net VAT to be paid: €160
Stage 2. The smelter has paid €200 VAT to the mine and, say, another €20 VAT on other purchases, such as furniture, stationery, etc. So when the smelter sells €2000 worth of steel it charges €2400 including €400 VAT. The smelter deducts the €220 already paid on his inputs and pays €180 to the treasury. The treasury receives this €180 from the smelter plus €160 from the mine, plus €40 paid by the supplier of tools to the mine, plus €20 paid by the furniture/stationary supplier to the smelter.
Supply: €2.000
VAT on supply: €400
VAT on purchases: €220
Net VAT to be paid: €180
€180 (paid by the smelter) + €160 (paid by the mine) + €40 (paid by the supplier to the mine) + €20 (paid by the supplier to the smelter) = €400 or the correct amount of VAT on a sale worth €2000.
VAT coverage and VAT rates. Given that EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (only for supplies of goods and services referred to in an exhaustive list), actual rates applied vary between Member States and between certain types of products. In addition, certain Member States have retained separate rules in specific areas.
The most reliable source of information on current VAT rates for a specified product in a particular Member State is that country's VAT authority. Nevertheless, it is possible to get an overview of the different rates applied from the VAT rates in the European Union information document.
VAT on imports and exports. For the purpose of exports between the Community and non-member countries, no VAT is charged on the transaction and the VAT already paid on the inputs of the good for export is deducted - this is an exemption with the right to deduct the input VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the export price.
However, as far as imports are concerned, VAT must be paid at the moment the goods are imported so they are immediately placed on the same footing as equivalent goods produced in the Community. Taxable people registered for VAT will be allowed to deduct this VAT in their next VAT return.
VAT on goods moving between Member States. No frontier controls exist between Member States and therefore VAT on goods traded between EU Member States is not collected at the internal frontier between tax jurisdictions.
Goods supplied between taxable persons (or VAT registered traders) are exempted with a right to deduct the input VAT (zero-rated) on despatch if they are sent to another Member States to a person who can give his VAT number in another Member State. This is known as an "intra-Community supply". The VAT number can be checked using the VAT Information Exchange System (VIES).
The VAT due on the transaction is payable on acquisition of the goods by the taxable customer in the Member State where the goods arrive. This is known as "intra-Community acquisition". The customer accounts for any VAT due in his normal VAT return at the rate in force in the country of destination.
How do the Member States apply VAT? The detailed application of VAT varies according to the administrative customs and practices of each Member State within the framework set out by Community legislation.
Why do all Member States use VAT? At the time when the European Community was created, the original six Member States were using different forms of indirect taxation, most of which were cascade taxes. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product. As a consequence, there was always a risk that Member States would deliberately or accidentally subsidise their exports by overestimating the taxes refundable on exportation.
It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. As explained in VAT on imports and exports, VAT allows for the certainty that exports there are completely and transparently tax-free.
The history of VAT in the European Union until 1993. On 11 April 1967 the first two VAT Directives were adopted, establishing a general, multi-stage but non-cumulative turnover tax to replace all other turnover taxes in the Member States. However, the first two VAT Directives laid down only the general structures of the system and left it to the Member States to determine the coverage of VAT and the rate structure.
It was not until 17 May 1977 that the Sixth VAT Directive was adopted which established a uniform VAT coverage. This guarantees that the VAT contributed by each of the Member States to the Community's own resources can be calculated. It still however, allowed Member States many possible exceptions and derogations from the standard VAT coverage. Moreover, it did not set out the rates of VAT to be applied in Member States with the result that these differ widely even today. Currently, there is a standard rate of between 15% and 25% (the maximum is based on a political commitment) and Member States may apply 1 or 2 reduced rates of at least 5%. There are a number of temporary derogations, e.g. zero rates in the United Kingdom and Ireland. The VAT coverage also still differs from one Member State to another.
VAT and the Single Market - 1993 to now. The realisation of the single market in 1993 resulted in the abolition of controls at fiscal frontiers. To achieve this, the Commission proposed moving from the pre-1993 "destination based" system, where VAT is effectively charged at the rate of VAT applicable where the buyer is established, to an "origin based" system, with VAT being charged at the rate in force where the supplier is established. This would have effectively abolished fiscal frontiers within the EU.
This was, however, not acceptable to Member States as rates of VAT were too different and there was no adequate mechanism to redistribute VAT receipts to mirror actual consumption.
Therefore, until the conditions were right the Community adopted the Transitional VAT System which maintains different fiscal systems but without frontier controls. The intention is still eventually to have a common system of VAT where VAT is charged by the seller of goods - an origin based VAT system. The transitional system is an origin based system for sales to private persons who can go and buy tax paid anywhere they like in the Union and take the goods home without having to pay VAT again. There are some exceptions to this general rule however (e.g. the purchase of new means of transport and distance selling). For transactions between taxable persons it is still a destination based VAT system.
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What is VAT? VAT Registration
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