Businesses and charging VAT

How VAT works

VAT is charged on things like:

• business sales - eg when you sell goods and services
• hiring or loaning goods to someone
• selling business assets
• commission
• items sold to staff - eg canteen meals
• business goods used for personal reasons
• ‘non-sales’ like bartering, part-exchange and gifts

These are known as ‘taxable supplies’. There are different rules for imports and exports and charities.

Responsibilities

VAT-registered businesses:

• must charge VAT on their goods or services
• may reclaim any VAT they’ve paid on business-related goods or services

If you’re a VAT-registered business you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return which is usually due every 3 months.

You must account for VAT on the full value of what you sell, even if you:

• receive goods or services instead of money (eg if you take something in part-exchange)
• haven’t charged any VAT to the customer - whatever price you charge is treated as including VAT

If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

VAT rates

There are 3 different rates of VAT and you must make sure you charge the right amount.

Standard rate

Most goods and services are standard rate. You should charge this rate unless the goods or services are classed as reduced or zero-rated.

Reduced rate

When to charge this rate can depend on the item being provided but also the circumstance of the sale. For example:

• children’s car seats and domestic fuel or power are always charged at 5%
• mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home

Zero rate

Zero-rated means that the goods are still VAT-taxable, but the rate of VAT you must charge your customers is 0%. Examples of zero-rated goods include:

• books and newspapers
• children’s clothes and shoes
• motorcycle helmets

You still have to record zero-rated transactions in your VAT accounts and report them on your VAT Return.

What you must do when charging VAT

You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases.

If a transaction is a standard, reduced or zero-rated taxable supply, you must:

• charge the right rate of VAT
• work out the VAT if a single price is shown that includes or excludes VAT
• show the VAT information on your invoice
• show the transaction in your VAT account - a summary of your VAT
• show the amount on your VAT Return

You may be able to reclaim the VAT on purchases that relate to these sales.

VAT-inclusive and exclusive prices

You’ll need to make a calculation when charging VAT on goods or services, or when working out the amount of VAT you can claim back on items which were sold inclusive of VAT.

VAT-inclusive prices

To work out a price including the standard rate of VAT (20%), multiply the price excluding VAT by 1.2.

To work out a price including the reduced rate of VAT (5%), multiply the price excluding VAT by 1.05.

VAT-exclusive prices

To work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2.

To work out a price excluding the reduced rate of VAT (5%) divide the price including VAT by 1.05.

When not to charge VAT

You can’t charge VAT on exempt or ‘out of scope’ items.

Exempt goods and services

Exempt goods or services are supplies that you:

• can’t charge VAT on
• must not include in your VAT records

If you buy or sell an exempt item you should still record the transaction in your general business accounts. Examples of exempt items include:

• insurance
• postage stamps or services
• health services provided by doctors

If you start selling items that aren’t exempt

Businesses that sell only VAT-exempt goods and services don’t have be registered for VAT.

If you start selling items that aren’t exempt, you must register for VAT within 30 days. You may get a penalty if you don’t.

Out of scope

Some goods and services are outside the VAT tax system so you can’t charge or reclaim the VAT on them. For example, out of scope items include:

• goods or services you buy and use outside of the EU
• statutory fees - like the London congestion charge
• goods you sell as part of a hobby - like stamps from a collection
• donations to a charity - if given without receiving anything in return

Charging VAT to charities

As a VAT-registered business, you can sell certain goods and services to charities at the zero or reduced rate of VAT.

It’s your responsibility to check the charity is eligible, and to apply the correct rate.

Check the charity is eligible

To make sure the charity is eligible, ask them for:

• evidence that they’re a charity
• a written declaration or ‘certificate’ confirming they meet the conditions for the particular VAT relief

Evidence of charitable status

The charity should give you either:

• their Charity Commission registration number
• a letter of recognition from HM Revenue and Customs (HMRC) if they’re not registered with the Charity Commission for England and Wales (eg if they’re a Scottish or Northern Irish charity)

Written declaration

Charities are legally required to give you an eligibility certificate when you supply eligible building or construction services to them at zero VAT. The certificate must contain specific information.

A declaration is not legally required for other items you sell at the zero or reduced rate, but you should ask for one to prove the charity is eligible for the relief.

These sample declarations contain examples of the information a charity should give you when buying:

• medical and scientific equipment, motor vehicles and computer software
• charity advertising
• goods and services for disabled people

The written declaration should be separate from the order form or invoice for the goods or services the charity is buying.

Items that qualify for the reduced rate

You may be able to apply the reduced VAT rate when you sell fuel and power in certain circumstances to an eligible charity.

Items that qualify for the zero rate

You may be able to apply zero VAT when you sell the following to an eligible charity:

• advertising and items for collecting donations
• aids for disabled people
• construction services
• drugs and chemicals
• equipment for making ‘talking’ books and newspapers
• lifeboats and associated equipment, including fuel
• medicine or ingredients for medicine
• resuscitation training models

Equipment for medical and veterinary use

You may also be able to zero-rate some other medical and veterinary equipment when you sell it to:

• certain health bodies, eg NHS Trusts
• not-for-profit research institutions
• charities that provide institutional care, or medical or surgical treatment for chronically sick or disabled people
• charities that provide transport services for disabled people
• charities that provide rescue or first aid services to humans or animals
• someone buying it specifically for donation to one of these bodies

The money used to buy the equipment must be from charitable or donated funds. This should be stated on the eligibility declaration.

The eligible items include:

• medical, veterinary and scientific equipment
• ambulances
• goods for disabled people
• motor vehicles for medical use
• rescue equipment
• resuscitation training dummies

Returned goods

When you return goods to a supplier or a customer returns goods to you, the balance of payment can be settled by issuing either a:

• replacement invoice
• credit or debit note

If you exchange the goods for goods of the same value you don’t need to issue a new VAT invoice.

Credit and debit notes

These must show the same information as the VAT invoice and:

• why it was issued
• the total amount credited, excluding VAT 

• the number and date of the original VAT invoice

Discounts and free gifts

Discounts

VAT may have to be charged on discounts and deals.

Offer	How to charge VAT
Discounts	Charged on the discounted price (not the full price)
Gifts	Charged on the gift’s full value - there are some exceptions listed below
Multi-buys	Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
Money-off coupons, vouchers etc	No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
‘Face value’ vouchers that can be used for more than one type of good or service	No VAT due, if sold at or below their monetary value
Redeemed face value vouchers	Charged on the full value of the transaction
Redeemed face value vouchers sold at a discount	Charged on the discounted value of the transaction
Link-save offers (buy one get one free or discounted)	VAT is apportioned as mixed-rate goods - there are exceptions

Exceptions for gifts and link-save offers

There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.

VAT is charged on the combined value of link-save items if the incentive product:

• has a resale value of less than £1
• has a sale value of less than £5
• costs you less than 20% of the total of the other items in the offer
• isn’t sold at a separate price from the main product

Free goods and services

You don’t have to pay VAT on things like free samples if they meet certain conditions.

Supplies	Condition to meet so no VAT due
Free samples	Used for marketing purposes and provided in a quantity that lets potential customers test the product
Free loans of business assets	The cost of hiring the asset is included in something else you sell to the customer
Free gifts	The total cost of all gifts to the same person is less than £50 in a 12 month period
Free services	You don’t get any payment or goods or services in return