A Complete Guide To VAT In The UK

The Different VAT Rates In The United Kingdom

Tax rates can vary in the UK, with some items being taxed at a different rate to others. While most items do fall under a standard rate, others are reduced according to the decisions of the government. Right now, there are three key tax rates in the United Kingdom:

• Standard Tax Rate – 20%
• Reduced Tax Rate – 5%
• Zero Tax Rate – 0%

The government is able to determine which products or services benefit from lower rates of tax, thanks to a change in 2021 that meant the EU VAT directive in EU countries could be utilised in the UK too. One of the more significant changes involves women’s sanitary products, which up until January 2021 were charged at the standard rate of tax. Now, these items fall under the Zero Tax Rate, following calls from campaigning groups. 

If you already own a business, or you’re considering starting up, you should familiarise yourself with the different rates of tax charged according to the product or service. We’ve compiled a table of the most popular groups to help.

Product or Service	UK Tax Rate
Water supplies	0% and 5%
Foodstuffs	0% and 20%
Pharmaceutical supplies	0% and 20%
Medical equipment for people with a disability	0% and 5%
Books	0%
Books on other physical means of support	0% and 20%
Newspapers	0%
Passenger transport	0%
Periodicals	0%
Children’s car seats	5%
Admission to cultural locations (e.g. theatres)	20% or Exempt
Admission to amusement parks	20%
Admission to sports events	20%
Hotel accommodation	20%
Restaurants	20%
Restaurant services (inc. catering)	20%
Pay TV	20%
Shoes and leather goods	20%
Clothing and household linen	20%
Hairdressing services	20%
Writers	20%
TV License	Exempt
Medical and dental care	Exempt

Some items might fall under the Flat Rate Tax Scheme, so you should consult guidance published by HMRC for more information.

Limits To VAT Deduction In The UK

In the UK, products or services used for business purposes can usually be VAT-deducted, but this isn’t the case for all items. Some products or services are not deductible, or are subject to specific rules that need to be followed, such as:

• Business gifts are always 0% deductible, regardless of what the item is or does.
•  If an employee is claiming expenses for restaurant meals or hotel accommodation as part of their job, the input VAT on these services is 100% deductible.
• Business conferences or exhibitions also fall under the 100% deductible rule for input VAT, but only as long as the expenses arise from a business need by an employee.
• Traveling for a business purpose can also impact employees, so there is a 50% deductible rate on VAT for fuel expenses, car repair or car rental if these services are used for a combination of business but also personal reasons. If an employee is only using these services for business reasons, then 100% of the VAT can be deducted.
• Other traveling services like train fares and taxis are also 100% tax deductible, as long as these are used for business purposes.
• Although business costs are often deductible, there are some exceptions, like client entertainment costs which are 0% deductible in the UK (although there may be applicable variations for overseas customers).

On top of strict conditions around what is and isn’t VAT deductible, HMRC also enforces regulations around when VAT can be deducted before any economic activity, or the spending of money, is carried out. For example, business services provided within the six months leading up to the registration date can be deducted beforehand, as well as any stock items that will still be in stock at the registration date. It’s vital that if you plan to deduct VAT before you spend any money, you clarify whether this is allowed within UK legislation.

The Statute Of Limitations In The UK

For most VAT activity in the UK, there is a statute of limitations of four years. This means that any input VAT needs to be claimed in a VAT return that is filed a maximum of four years after the year the deductible amount was due.

The four-year rule also applies to your general obligation to pay VAT owed to HMRC. However, in certain cases, such as financial fraud or deliberate efforts to avoid your VAT obligations, this four year period can be significantly extended – this extension can be up to 20 years, so it’s important to understand and follow the HMRC guidance carefully.

Tax Point Rules In The UK

In the UK, different terminology can be used to describe when VAT should be paid, and how much is owed to HMRC by individuals or businesses. The term tax point is used to identify the point in time when VAT actually becomes owed, for example when an item or service is acquired, but this term is often confused with the VAT payable. The payable period begins the day after the final day of the reporting period, and it needs to be completed by the final date given to submit and pay the VAT return.

For example, most taxpayers in the UK follow the traditional calendar quarters, which means the final day of the reporting period is 31 March. VAT will therefore become payable from 1 April, even for goods or services that were acquired on 20 January.

To make your calculations easier, there are a number of general rules that you can follow:

• The tax point is when you either receive a product or when services provided to you by a company are fully completed.
• When you prepay for items or pay in advance, you create a tax point. The VAT will still be payable at the end of the payable period, but it will become due when the prepayment is made, with few exceptions (such as refundable security deposits).
• There is a 14-day window before and after the point of item supply, during which if an invoice is issued the date outlined on the invoice becomes the tax point. If you’re a UK taxpayer, you will be able to apply for an exception in some cases, but the success of this will be determined on an individual basis.
• If you’re importing items, then the tax point will occur on the day the goods are imported and are dependent on the correct import documents being presented.

There is an exception to this rule for certain online sales – for orders below £135 placed online and shipped internationally into the UK, the tax point is the point of sale, and not the day of the import.

For more information on tax rates, rules or exceptions in the UK, then you can visit the gov.uk website to find the relevant HMRC guidance.