VAT – What is VAT?

VAT – short for Value-added Tax – is a tax charged on the value added to goods and services. In many countries, VAT is known as GST.

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As goods and services progress through a supply chain, they increase in value. VAT taxes the value that is added at each stage.

VAT is a consumption tax, meaning that it’s paid by the end customer rather than the business selling the goods or services.

Do I need to charge VAT?

Businesses can only charge VAT if they are VAT-registered. Any business that’s registered for VAT must charge VAT on any taxable sales.

If your VAT taxable turnover is more than £85,000, you need to register for VAT through HMRC. However, even if you don’t reach the £85,000 VAT registration threshold, you can also opt-in to VAT registration.

When you sell goods outside of the UK, the rules on charging VAT can get a bit complicated. Whether or not you should charge VAT on exports (i.e. export VAT) depends on where the customer is based, whether the customer is VAT-registered, how much you sell, and whether you sell goods or services.

How much VAT should I charge?

VAT is calculated as a percentage of the total value of the good or service.

In the UK, the vast majority of goods and services will fall under the standard VAT rate of 20%. However, some goods and services are classed as VAT-exempt, reduced, or zero-rated. Whether a product qualifies for reduced VAT rates can depend on who’s selling the product, who’s buying the product, where it's provided, and the nature of the product.

If you’re unsure of how much VAT to charge, you can find out more with HMRC's extensive list of reduced and zero-rated goods and services.

When is VAT charged at 0%?

Zero-rated goods and services are usually seen as ‘essential’ items, and can include:

  • Children’s clothes or shoes

  • Books and newspapers

  • Physical education and sports activities

  • Building a new house or flat.

Goods or services that qualify for 0% VAT rate are still ‘VAT-taxable’. This means that you must still charge your customers tax but should mark the rate as 0%. You must also record these sales in your VAT accounts and report them when filing VAT Returns.

When is VAT charged at 5%?

Reduced-rate goods and services are usually taxed at 5%. Examples of reduced-rate items include:

  • Fuel, power, and energy for domestic use

  • Children’s car seats

  • Green energy and energy-saving materials – such as wind turbines or solar panels.

VAT and invoicing

When you make a taxable sale, you must issue a VAT invoice that includes certain details about VAT, such as your VAT number, how much VAT is due on each product provided, and the total amount of VAT due. If you’re not registered for VAT, you don’t need to include this information on your sales invoices.

In the UK, it’s common for companies to advertise goods and services at the gross price – that is, including VAT. If you advertise a product at the net price (i.e. before VAT) be sure that this is clearly marked so there’s no confusion about how much your customers need to pay.

VAT and SumUp Invoices

SumUp Invoices is free online invoicing software that helps you create compliant VAT invoices in less than a minute. 

With our simple invoice template, you just need to fill in the customer and item details, and the software will calculate the totals and VAT for you. You can then issue it to your customer’s email address in a flash. 

We offer a variety of different payment options, including card readers and online payment links integrated directly into your invoices. 

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