Vat rates apply to good and services whether you’re a sole trader, LLC or a PLC if you’re VAT registered, you need to charge your clients or customers VAT.
VAT rates introduction
However, there is much confusion among nascent business owners and sole traders when it comes to whether or not they have a legal obligation to be VAT registered.
What’s more, which goods and services are charged VAT at the standard rate, which are charged differently and which are exempt.
Here we’ll aim to answer all of your VAT related questions and leave you with a clear idea of which goods and services should include VAT, which are exempt and which are charged at a different rate.
Should I be VAT registered?
One of the first questions many budding entrepreneurs ask is whether or not they are legally obliged to be VAT registered (and if it’s in their best interest to register voluntarily if they are not legally obliged).
Until 1st April 2020 the annual threshold for VAT registration stands at £85,000.
Thus, if your turnover of taxable supplies exceeds £85,000 within the financial year, or you suspect that it will, you are legally obliged to register for VAT.
Nonetheless, even if your turnover does not meet or exceed this threshold it may still be beneficial to apply voluntarily.
Many businesses voluntarily apply because they want to appear larger in scope, making a bigger impression on their clients and competitors.
What’s more, once you are registered you will be able to reclaim the VAT which you have paid to your suppliers (this is known as input tax) and if all your clients are VAT registered anyway they want care whether you charge them VAT or not.
Thus you can actually save money by reclaiming VAT on costs.
Feel free to get in touch with us about our vat consultancy service if you are unsure whether or not your business should be VAT registered.
Does the standard VAT rate of 20% apply to all goods and services ?
As consumers, many of us have grown accustomed to paying 20% VAT on all eligible products.
Yet, this does not mean that the standard rate of VAT applies to all products. In order to ascertain whether or not it’s within your best interests to register for VAT you will need to learn which rates apply to which services, goods and products.
Before we get into specifics, however, remember that…
The VAT rates that apply are are subject to certain conditions and circumstances. In many cases, whether or not VAT applies (or how much) on goods and services depends on;
- Whether it’s goods or services makes a difference.
- Who buys them.
- Who provides them.
- The way in which a product is packaged, labeled or displayed.
- Where they are provided.
- Whether accurate records are kept and necessary evidence is provided.
- Whether they are provided along with other goods or services.
Let’s take a look at some of the most common industries in the UK and the rates which may apply to goods and services inherent within those industries…
Food and drinks
The food and drink industry is one of the most popular areas in which to start a business in the UK. However, it can be something of a minefield when it comes to VAT.
Food and drinks which are not classed as luxury and sold for human consumption are almost always zero-rated.
Nonetheless, there are circumstances under which food and drinks will be standard-rated at 20%. Event catering, for example, where food is provided for consumption off-premises is always standard-rated.
What’s more, the following items are also standard rated;
- Beers, wines, spirits and other alcoholic drinks.
- Confectionery, nuts, crisps and other savoury snacks.
- Hot food.
- Energy / sports drinks.
- Hot takeaway foods.
- Ice cream, ice lollies and sorbet.
- Soft drinks, juices and mineral water.
- Hot drinks such as tea, coffee and hot chocolate.
Restaurants and hot takeaway outlets must charge VAT on all hot foods.
However, VAT does not need to be charged on cold foods such as sandwiches which are intended to be consumed off the premises unless they are intended to be eaten in a designated area.
Animals, plants and seeds
Farms and agricultural businesses may rely on the purchase and sale of animals, plants and seeds. Likewise pet shop owners, animal breeders and pet food manufacturers may be unsure when it comes to understanding which (if any) rates apply.
Packaged pet foods, for example, are always standard rated including “straights” such as raw peanuts and sunflower seeds.
When it comes to animals themselves, by rule of thumb all livestock animals are zero-rated i.e. as long as they are of a kind generally used in the UK, or yielding or producing food for human consumption.
Pets on the other hand are generally standard-rated.
In terms of plants, flowers and seeds, ornamental plants are standard rated as are seeds intended for consumption by animals and birds.
Crops, spores, seeds and seedlings intended for the growth of food for human consumption, however, are zero-rated.
By rule of thumb, anything pertaining to animal agriculture (even if that is not its intended purpose) is zero-rated.
Even edible animals such as rabbits, which are most commonly kept as pets than as livestock, are zero-rated.
Sport and leisure
Most services pertaining to sport and exercises for eligible bodies are zero-rated.
Thus, personal training, sports tuition or martial arts are all zero-rated for eligible bodies.
Eligible bodies are usually non-profit organisations such as leisure centres.
However, any entity may be eligible so long as it meets the following criteria;
- It is non-profit making OR…
- Its constitution contains a non-distribution clause or it limits its distribution of profits or surpluses to another non-profit making club.
- It uses all profits from its playing activities to maintain or improve the related facilities or the purposes of a non-profit making body.
- It is otherwise demonstrably not subject to commercial influence.
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Club membership fees, on the other hand are standard rated.
Nonetheless, because sports equipment, gym equipment, buildings and premises are all standard rated VAT registered sporting and leisure businesses will be able to reclaim the VAT spent on their input taxes.
Most leisure activities pertaining to gaming and gambling are VAT exempt. These include;
- Pools betting.
- Bingo (including internet bingo and other online games of chance).
- Lottery ticket sales and retailer commission thereof.
- Online lottery games.
Art, culture and antiquities
Admissions charges by eligible bodies such as art galleries, museums, zoos and theatrical performances are all VAT exempt so long as eligibility criteria are met.
Likewise antiques and works of art sold by private treaty to public collections are also exempt as are antiques and antiquities sold to settle tax or estate duty debt.
Welfare and charities
By rule of thumb, charities are always VAT exempt. Everything from admissions charges to advertising services and the sale of donated goods is either VAT exempt or outside of the scope of VAT.
Likewise, most welfare services are also either VAT exempt or outside.
The only exceptions are as follows;
- Energy saving materials permanently installed in residential buildings (these are charged at 5%).
- Mobility aids for the elderly (also charged at 5%).
Healthcare institutions such as hospitals, hospices and residential homes for the elderly and / or disabled are all VAT exempt.
This includes the writing of prescriptions and dispensing of medicines as well as services provided by dentists, opticians and other health care professionals.
Likewise healthcare products are treatments are VAT exempt with a few exceptions including;
- Maternity pads
- Sanitary protection products
The reduced rate of 5% applies to both of these.
However, vision aids of the blind or partially sighted are exempt.
All education and vocational services provided by schools, colleges and universities are VAT exempt.
Private tutors working in a personal capacity for services normally provided by schools are also VAT exempt.
Printing and publications
Books, magazines, brochures, leaflets and pamphlets are zero-rated, as are children’s picture books, colouring books, maps and charts.
The only exception to this was e-books, although the VAT on e-books was axed late last year.
Financial services and insurance
Broadly speaking, the financial services industry is VAT exempt, including investments, intermediary financial services and credit management.
Financial services are also exempt when supplied with other goods and services so long as financial service is the principal element of the supply.
Insurance services are also exempt, even when supplied with other goods or services.
Once again, this is contingent upon insurance being the principal element of the supply.
Utilities and energy
Electricity, gas and other fuels for residential energy and heating purposes are charged at a rate of 5%.
Water supplied to households is zero-rated while water supplied to industrial customers is standard-rated.
Likewise, any fuel for business use is standard rated. Energy supplied to charities for non-business use is zero-rated.
Energy saving materials such as wood fueled boilers, insulation, solar panels and wind/ water turbines are charged at 5%.
Building and construction
The buying and selling of land and property can be VAT exempt.
The construction of new residential properties is VAT exempt.
Some substantial property renovations and installations are zero-rated (unless they pertain to energy saving measures such as solar panels).
There are, however a few exceptions such as;
- Construction services pertaining to the conversion of an existing premises by increasing the number of dwellings within the building (i.e. converting a house into apartments) is rated at 5%.
- Renovating a property which has been unoccupied for 2 years or more is also rated at 5%.
Vehicles and transportation
Most land, sea and air vehicles are zero-rated.
Shipbuilding is also zero-rated up to a gross tonnage of 15 tons or more.
The only exception to this is caravans. In some cases, holiday caravans over 7m long or over 2.55m wide may be rated at 5%.
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Clothing, shoes and protective gear
Most clothing intended for wear by adults is standard-rate.
Nonetheless, children’s clothing and footwear (including babywear) are zero-rated.
Protective clothing is slightly more inconsistent.
CE marked cycle helmets and motorcycle helmets that meet safety standards are zero-rated as are hard hats and protective boots.
Children’s car seats, booster seats and bare wheeled safety seats are rated at 5%.
Prams and pushchairs, however, are standard-rated.
The better you know the VAT rates on goods and services, the easier it is to determine whether or not your business should be VAT registered.