The VAT rate in the UK for companies (VAT – value added tax) from January 1, 2011 is 20%. Registration of a company as a payer of value added tax leads to mandatory quarterly VAT submissions.
VAT has three types of rates: 20% – standard rate, 5% – reduced, 0% – zero. Some goods are exempt from this type of tax, or are outside the VAT system. The reduced VAT rate applies to child car seats, sanitary products, domestic fuel and energy products, energy-saving installations, etc. The zero VAT rate is used when selling books and newspapers, children’s shoes and clothes, paying in public transport, selling food outside restaurants and houses. Free from VAT under UK law are insurance, credit, education and training services (subject to certain conditions), charitable fundraising activities (subject to certain conditions), membership fees (subject to certain conditions), dental services and doctors. The lease and sale of commercial buildings and land are also independent from VAT. However, a company may choose to forego the exemption and use the default VAT rate to recover the input tax if there are no other options. Outside the VAT system are the fees established by the legislation of the country and known as “mandatory payments”, non-productive activities classified as hobbies.
Introduction as VAT payer
Enrolment with the country tax authority as a VAT payer is required when selling commodities or services by a company with a turnover of 12 months above the “VAT threshold” set at £ 79,000, or if there is a suspicion that this “threshold” is exceeded. Otherwise, it is not required.
After obtaining the status of a VAT payer, you must submit a VAT Declaration quarterly, where you indicate the amount of VAT withdrawn from customers (output tax) and VAT paid when purchasing a service (input tax). If the output tax exceeds the input tax, you must report the difference on your tax refund report to HMRC. Otherwise, the difference is also displayed. There are tax payment schemes for some forms of institutions, but we will talk about them a little later.
In most cases, a legal individual cannot register as a VAT payer or refund VAT on purchases if only VAT-exempt commodity or services are sold. If only some VAT-exempt commodity or services are in stock, you will not be able to get a VAT refund on all your purchases.
In United Kingdom VAT it is mandatory if:
- The company’s turnover for the previous 12 months is, or is expected to be, GBP 77,000 or more;
- Or the company is a buyer of goods produced in other EU countries.
A company in the country can also voluntarily obtain a VAT numbers for companies in the UK if it is required to carry out its business, for example:
- when the goods are physically transported through the EU. In this case, the VAT number may be required at customs and the goods may be detained until this number is received or the circumstances are clarified;
- when European partners added tax to purchase goods or services from a UK seller. If at the same time the British company-seller is not registered as a VAT payer and, accordingly, does not pay tax, then the value-added tax is collected in full from the European company-buyer.
- when a company wants to claim a refund of “input VAT”. This applies only to commodities purchased no more than 3 years before registration for VAT, or services provided no more than six months before registration. Accordingly, goods and services should be used for the purposes of ensuring their own activities, and not further sale, and should also be reflected in its financial statements and be on the balance sheet of the company by the time of registration and VAT refund.
Best way to be registered company in the UK and not be liable for VAT
Obtaining a VAT number is carried out through the authorized body in the UK – HM Customs and Excise. The procedure can take up to 3 months. To register, you need to fill out a special form, answering a number of questions, and sign it with the director of the company. The list of questions includes: type of activity of the company, information about the director (address, TIN), turnover of the company, information about potential or existing partners. It is advisable to provide copies of invoices or contracts as evidence that the company is conducting or planning a business.
The process of obtaining VAT can be divided into 2 stages:
- A standard list of documents and forms for VAT registration is submitted to the tax office;
- As a result of the audit, in case of questions, the tax office sends clarifying questions and a list of additional documents.
You can obtain an exemption from the requirement to register with the UK tax authority when you purchase and sell only or most of the goods or services with a zero VAT rate.
Preparation and submission of VAT reports
Additional VAT in the UK leads to the mandatory submission of seasonally VAT returns. Reports are prepared by a certified British accountant on the basis of documents provided by the client.
The cost of preparing and submitting quarterly reports depends on the number of transactions.
From our experience, the average cost of preparing VAT returns (per quarter) is 300 – 350 GBP, but this is only a guideline. Optionally, you can pre-agreed the number of transactions and the cost of reporting on this tax.
The following documents are usually required to prepare a value added tax report:
- Bank statements for the reporting period;
- Sales invoices;
- Purchase invoices;
If a British company registered for VAT in the UK does business with countries outside the EU, then the declaration for this tax must also include information (and documentary evidence) about such activities. These can be the following documents:
- correspondence with customers;
- sales invoices;
- description of the delivery set;
- invoices from carriers;
- Bank statements;
- shipping invoices.
The above documents must contain information:
- about the company’s business;
- about the company’s customers;
- about goods / services and their cost;
- about methods of transportation, delivery and their ways;
- about the place of delivery.
The above documents must be kept by the company for 6 years and must be provided at the request of the tax.