The ins and outs of VAT

HMRC Reference:Notice 700/15 (March 2002) View Change History
 

Contents

Foreword

Other notices on this or related subjects

1. Introduction

1.1 What is this notice about?

2. Output tax

2.1 What is output tax?

2.2 What are taxable supplies?

2.3 Are there other kinds of supplies?

2.4 Is the rate of VAT always the same?

2.5 How do I know if any of my supplies are exempt or zero-rated?

2.6 What is the difference between exempt and zero-rated supplies?

2.7 Is there anything else?

2.8 What should I be thinking about?

2.9 Do I still have to account for VAT if no money is paid?

3. Output tax: Illustrative questions

3.1 I run a garage and agree to repair the butcher’s van in return for them cancelling my last month's bill. Do I have to account for VAT on the repair?

3.2 I sell new cars to the public. I give a full tank of petrol with each car without further charge. Must I account for VAT on the value of the petrol as well as on what I charge for the car?

3.3 Customers ask me to put something by for them and give me £5. Do I have to account for VAT on this and the balance when they collect the goods?

3.4 I've issued tax invoices for a number of sales but my customers haven't paid me yet. Must I still account for the VAT on them?

3.5 I’ve issued a credit note for returned goods. How do I account for the VAT?

3.6 I run a small hotel and ask for a deposit on advance bookings. Do I have to account for VAT on it?

3.7 I own an electrical shop and ask friends to carry out some repairs. They offer to do them for me free of charge if I give them a small radio from my shop. Do I have to account for VAT on it?

3.8 I sell a car that has been used for my business. Do I have to account for VAT?

3.9 I sell a van that has been used for my business. Do I have to account for VAT?

3.10 I sell goods to customers in another EC member state. Do I have to charge VAT?

4. Input tax

4.1 What is input tax?

4.2 Can I always get back my input tax?

4.3 What if I make exempt supplies?

4.4 What if I use something privately as well as for the business?

4.5 How do I get my input tax back?

4.6 What proof will I need?

5. Input tax: Illustrative questions

5.1 I have not yet paid some of my purchase invoices when my return is due. Can I still deduct the VAT?

5.2 I pay for some tools for my brother to help him set up in business in a small way. As I paid for them can I deduct the VAT?

5.3 I have received a credit note for faulty goods returned. How do I account for the VAT?

5.4 I order an expensive item of machinery and the manufacturer sends me an invoice headed “PRO-FORMA” showing full details of the cost, terms and VAT. Can I deduct the VAT on my next return?

5.5 I use my car for private motoring as well as in the business. What do I do about the VAT on petrol?

5.6 I buy some goods for my business and lose the VAT invoice. Can I still deduct the VAT if I have the statement?

Do you have any comments?

 

Foreword

This notice cancels and replaces Notice 700/15 (November 2000). Details of any changes to the previous version can be found in paragraph 1.1 of this notice.

Further help and advice

If you need general advice or more copies of Customs and Excise notices, please ring the National Advice Service on 0300 200 3700. You can call between 8.00 am and 8.00 pm, Monday to Friday.

If you have hearing difficulties, please ring the Textphone service on 0300 200 3719.

If you would like to speak to someone in Welsh, please ring 0300 200 3705, between 8.00 am and 6.00 pm, Monday to Friday.

All calls are charged at the local rate within the UK. Charges may differ for mobile phones.

Other notices on this or related subjects

700 The VAT guide
706 Partial exemption
718 Margin schemes for second-hand goods, works of art, antiques and collectors’ items
723 Refunds of VAT in the European Community for EC and non-EC business
725 The Single Market
727 Retail schemes
731 Cash accounting
741 Place of supply of services
700/12 Filling in your return
700/18 Relief from VAT on bad debts
700/64 Motoring expenses

1. Introduction

1.1 What is this notice about?

This notice is a brief guide to dealing with VAT charged to or by you in the course of your business. You will find more information about this and other areas of VAT in Notice 700 The VAT Guide.

The notice has been restructured to improve readability.

Paragraphs 2.8 and 2.9 contain revised monetary limits.

This notice and others mentioned are available both on paper and on our Internet website at www.hmce.gov.uk.

2. Output tax

2.1 What is output tax?

This is the VAT you charge your customers when you make taxable supplies.

2.2 What are taxable supplies?

If you are in business and you sell goods (making a supply of goods) or if you do something for someone else and are paid for doing it (making a supply of services), it is more than likely that you are making taxable supplies.

Anything you do by way of business can be a taxable supply - not just things you do in the ordinary course of your day-to-day business. When you are registered, VAT is chargeable on all the taxable supplies you make. This is your output tax.

2.3 Are there other kinds of supplies?

Yes. A number of business supplies are not taxable because the law says that VAT is not to be charged on them. These supplies include loans of money, and some property transactions.

These are called exempt supplies. It is important to know whether you make any exempt supplies because this may affect the amount of VAT you can get back on things you buy for your business.

2.4 Is the rate of VAT always the same?

No. There are three rates of VAT:

  • a standard rate, currently 17.5%;
  • a reduced rate of 5%; and
  • a zero rate (nil).

2.5 How do I know if any of my supplies are exempt or zero-rated?

Notice 700 The VAT Guide tells you the areas of business where some supplies may be exempt or zero-rated. If you are not sure about any of your supplies, ask our National Advice Service. Remember, any taxable supply which is not liable either at the zero-rate or the reduced rate is standard-rated.

2.6 What is the difference between exempt and zero-rated supplies?

With both zero-rated and exempt supplies you don't charge VAT on your supplies, but if you make exempt supplies you may not be able to get back all the VAT that you have paid. There is more about this in paragraphs 4.1 to 4.4.

2.7 Is there anything else?

Yes. Some things are not in the VAT system at all. These we say are “outside the scope”. Some are obvious. For example, if you buy and sell goods abroad, you do not have to pay United Kingdom VAT because the goods have not been supplied in this country. In addition, there are special rules for deciding where certain services must be taxed when they are performed outside the UK or are supplied to a customer outside the UK. You will find information about this in Notice 741 Place of supply of services. But supplies can be “outside the scope” even if the transaction takes place here. For example, if you own a shop and sell some furniture privately from your flat above the shop, the supply is outside the scope of VAT because the sale of things that have never been used in your business is not a business sale.

Supplies of goods or services within the EC can be inside or outside the scope of UK VAT depending on the nature of the transactions (see Notice 725 The Single Market).

2.8 What should I be thinking about?

When you are working out the VAT you should charge and pay to Customs and Excise, don't just look at your day-to-day sales. Here are some of the other taxable supplies that you may also be making:

  • sales to your staff (for example, canteen meals, goods at reduced prices, sales from vending machines);
  • sales of business assets (such as office equipment, commercial vehicles);
  • hire or loan of goods to someone else;
  • gifts of goods which cost you more than £50;
  • goods which you or your family have taken out of the business for your own use; and
  • commission received in return for selling something on behalf of someone else.

Remember - when pricing, costing or estimating always ask yourself “should I charge VAT?” If you have not charged VAT when you should have, you will still have to account for the output tax to Customs and Excise. Whatever price you charge to your customer is treated as including VAT.

If you sell direct to the public there are several retail schemes that you may be able to use. You will find out about these in Notice 727 Retail schemes.

If the value of your taxable supplies, excluding VAT, is not more than £600,000 you may benefit from using the cash accounting scheme. Full details are in Notice 731 Cash accounting.

2.9 Do I still have to account for VAT if no money is paid?

It depends. If you provide genuinely free services there is no VAT. Free goods are treated a bit differently. If you occasionally give away to different people an item from stock that has cost you less than £50, there is no VAT. You must account for VAT on all other goods which you provide free of charge.

You must also account for VAT on the full value of anything you supply if you receive goods or services rather than money in return for it. For example, if you take something in part-exchange for goods you sell, you must account for VAT on the full value of what you sell, not just the money that changes hands.

3. Output tax: Illustrative questions

3.1 I run a garage and agree to repair the butcher’s van in return for them cancelling my last month's bill. Do I have to account for VAT on the repair?

Yes. You must account for VAT on the repair on the full amount you would normally charge for the work.

3.2 I sell new cars to the public. I give a full tank of petrol with each car without further charge. Must I account for VAT on the value of the petrol as well as on what I charge for the car?

No. The price that you charge is regarded as covering the car and the petrol. You only have to account for VAT on this amount.

3.3 Customers ask me to put something by for them and give me £5. Do I have to account for VAT on this and the balance when they collect the goods?

Yes. The £5 is an advance payment. VAT is due when you receive the £5 and on the balance when they collect the goods.

3.4 I've issued tax invoices for a number of sales but my customers haven't paid me yet. Must I still account for the VAT on them?

It depends. If you are using the cash accounting scheme you will not have to account for the VAT until you are paid. Otherwise, you must account for the tax on your next return in the normal way. However, you may be able to reclaim the VAT element of your payment under the Bad Debt Relief scheme (see Notice 700/18 Relief from VAT on bad debts).

3.5 I’ve issued a credit note for returned goods. How do I account for the VAT?

You must record the issue of the credit note in your records and take away the VAT from your output tax total for the period in which you issue the credit note.

3.6 I run a small hotel and ask for a deposit on advance bookings. Do I have to account for VAT on it?

Yes. This kind of deposit is an advance payment and you must account for VAT on it when you receive the payment.

3.7 I own an electrical shop and ask friends to carry out some repairs. They offer to do them for me free of charge if I give them a small radio from my shop. Do I have to account for VAT on it?

Yes. This is not a gift. It is payment in kind for your friends' services and VAT is due on the full amount that you would normally charge for the radio.

3.8 I sell a car that has been used for my business. Do I have to account for VAT?

Yes, if you were entitled to claim input tax on the purchase. (However, if you bought it from a private individual it may be eligible for sale under the margin scheme for second-hand goods, works of art, antiques and collectors’ items (Notice 718 Margin schemes for second-hand goods, works or art, antiques and collectors’ items gives further details).) Otherwise no.

3.9 I sell a van that has been used for my business. Do I have to account for VAT?

Yes. However, if you bought it from a private individual it may be eligible for sale under the margin scheme for second-hand goods, works of art, antiques and collectors’ items (Notice 718 gives further details).

3.10 I sell goods to customers in another EC member state. Do I have to charge VAT?

Providing you meet the conditions for zero-rating described in Notice 725 The Single Market, you do not have to charge VAT on goods you sell to a VAT-registered business in another member state. However, you must charge UK VAT at the rate applicable if you sell goods to private individuals.

4. Input tax

4.1 What is input tax?

Many of the things you buy bear VAT, but if you are registered you can usually get back the VAT charged on business purchases and expenses. This VAT is your input tax. It includes not only the VAT on your raw materials or on goods you buy for resale but also on things like:

  • equipment for your business;
  • your telephone bill (insofar as it has been used for your business); and
  • payments for services to do with your business (such as accountants' or solicitors' fees).

It does not include VAT paid on goods or services for someone else's business nor VAT on private purchases such as furnishings for your home. VAT charged in these circumstances is not your input tax.

4.2 Can I always get back my input tax?

When you spend money and have to pay VAT ask yourself “is this expense wholly for my business?” If it is, you will more than likely be able to deduct. In other words, get back your input tax.

There are some purchases on which you cannot deduct your input tax. The main ones are:

  • cars (including estate cars) that are available for private motoring but see Notice 700/64 Motoring expenses;
  • supplies for business entertainment; and
  • second-hand goods that have been sold to you under one of the VAT second-hand schemes.

The VAT rules about business expenses are sometimes different from the Inland Revenue rules. You should not assume that because something is a deductible expense under the Inland Revenue rules you can deduct any VAT charged on it.

4.3 What if I make exempt supplies?

If, as well as making taxable supplies, you make exempt supplies, such as certain sales or lettings of property, or you make loans, you may not be able to deduct all your input tax. This is because you are what is called “partly exempt”. However, if the input tax on all the purchases and other expenses you incur in making these exempt supplies is below the current de minimis limit, you can still deduct your input tax as though you make only taxable supplies.

Please remember that there are some exceptions to the rule because there are some special circumstances in which you can deduct input tax that relates to exempt supplies. Notice 706 Partial exemption tells you more about this.

4.4 What if I use something privately as well as for the business?

If you use services for both business and private purposes, such as your telephone, you can only reclaim the VAT on the business use. There are no hard and fast rules on how you split the bill. Your local VAT Business Centre will consider any reasonable method. If goods or services are wholly for private use the VAT charged is not input tax and cannot be reclaimed.

If you use goods partly for business and partly for non-business (or private) purposes, you may choose to apportion the tax in the same way as for services, and only count as input tax the tax relating to business use. If you wish, however, you may treat all the tax incurred as input tax and then account for output tax in each accounting period on the private or non-business use. If you choose to recover full input tax, you will need to keep records to show how the asset has been used.

The only exception to the above is road fuel where special rules apply. You will find more about this in Notice 700/64 Motoring expenses.

4.5 How do I get my input tax back?

When you fill in your VAT return you take away your input tax from the VAT that you have charged (your output tax) and pay the difference to Customs and Excise. If your input tax is greater than your output tax, you claim the difference from Customs and Excise. VAT Notice 700/12 Filling in your VAT return will help you to do just that.

If you have been charged VAT in another EC member state on purchases or expenses for your business, you may be able to get a refund of the VAT from the tax authorities there (see Notice 723 Refunds of VAT in the European Community for EC and non-EC Businesses).

4.6 What proof will I need?

To reclaim your input tax you must have a VAT invoice made out to you. The only exceptions are:

  • hotel bills and similar expenses which you meet, where the invoice may be in the name of your employee; and
  • certain expenses where the total cost including VAT was £25 or less, such as business calls from pay phones.

If you are unable to get a VAT invoice from your supplier, you should contact your local VAT Business Centre for help.

You will find more about evidence of input tax in Notice 700 The VAT Guide.

For goods removed from a customs warehouse or imported directly from outside the EC, a copy of the customs document, normally a Form C79 VAT certificate, will be issued to you.

Only a registered person may issue a VAT invoice. You should have no problem finding out from your suppliers whether they are registered. If you are in any real difficulty, ask our National Advice Service for help.

5. Input tax: Illustrative questions

5.1 I have not yet paid some of my purchase invoices when my return is due. Can I still deduct the VAT?

It depends. If you are using the cash accounting scheme you can only deduct VAT once you have paid the bill. If not, you can deduct the VAT provided you have a VAT invoice which shows a “tax point” date before the end of the period shown on the return.

5.2 I pay for some tools for my brother to help him set up in business in a small way. As I paid for them can I deduct the VAT?

No. You can only deduct VAT on supplies for your business. You cannot deduct VAT on supplies for someone else, even if you pay for them.

5.3 I have received a credit note for faulty goods returned. How do I account for the VAT?

Enter it into your records and take away the VAT from your input tax total for the period in which you receive the credit note.

5.4 I order an expensive item of machinery and the manufacturer sends me an invoice headed “PRO-FORMA” showing full details of the cost, terms and VAT. Can I deduct the VAT on my next return?

No. A pro-forma invoice is not a VAT invoice. It should be followed by a full invoice. Only then can you deduct the VAT. If your supplier does not send a tax invoice you should ask them for one.

5.5 I use my car for private motoring as well as in the business. What do I do about the VAT on petrol?

You can reclaim all the VAT as input tax, but you will have to account for tax on your private motoring using a scale charge. You will find more about this in Notice 700/64 Motoring expenses.

5.6 I buy some goods for my business and lose the VAT invoice. Can I still deduct the VAT if I have the statement?

No. To deduct the VAT you need a VAT invoice. A statement will not do. You should ask your supplier to provide you with a copy of the invoice. This must be clearly marked by your supplier as a duplicate. It is not enough just to get a photocopy. If you cannot get a duplicate invoice from your supplier, tell your local VAT Business Centre.

Do you have any comments?

We would be pleased to receive any comments or suggestions you may have about this notice. Please write to:

HM Customs and Excise
Business Services and Taxes
Customer Focus Team
New King’s Beam House
22 Upper Ground
LONDON
SE1 9PJ

If you have a complaint or suggestion

If you have a complaint please try to resolve it on the spot with our officer. If you are unable to do so, or have a suggestion about how we can improve our service, you should contact one of our Regional Complaints Units. You will find the telephone number under ‘Customs and Excise - complaints and suggestions’ in your local telephone book. Ask for a copy of our code of practice ‘Complaints and putting things right’ (Notice 1000). You will find further information on our website at http://www.hmce.gov.uk.

If we are unable to resolve your complaint to your satisfaction you can ask the Adjudicator to look into it. The Adjudicator, whose services are free, is a fair and unbiased referee whose recommendations are independent of Customs and Excise.

You can contact the Adjudicator at:

The Adjudicator's Office
Haymarket House
28 Haymarket
LONDON
SW1 4SP

Tel: (020) 7930 2292
Fax: (020) 7930 2298
E-mail: adjudicators@gtnet.gov.uk
or visit the website at http://www.adjudicatorsoffice.gov.uk

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