Value Added Tax (VAT) is a consumption tax assessed on the value added to goods and services. It applies to broadly all goods and services that are purchased or sold for use or consumption in the European Union.
VAT is only applicable in the European Union therefore when sales are made to customers outside of the EU then they are not subject to VAT, although there may be other local “sales taxes” or VAT equivalents in those countries which you may need to consider.
So as a business in the UK you will likely be charged VAT by many of your suppliers. The standard VAT rate in the UK is 20% so any of your VAT registered UK suppliers who invoice you will add 20% VAT to their invoices.
If you are not a VAT registered business yourself then you cannot reclaim this VAT, so effectively the cost of these supplies increases by 20%. However if you are VAT registered then you can reclaim this VAT charged to you by suppliers (what is termed “input VAT”) on your VAT return, so meaning that this VAT is not a cost to the business.
However your business being VAT registered also means that you need to charge VAT to your customers. This will mean that for a UK customer you would add 20% VAT to your invoices to them. If your customer is themselves VAT registered then this should not be a problem, as they will be able to claim this back on their VAT return, however if your customer is not VAT registered (eg. your customer is an end user and not a business) then they will not be able to reclaim this VAT back and so effectively your goods or services will become 20% more expensive to them.
Therefore when your business starts out you need to consider whether you wish to become VAT registered from setup or not, taking into account how much input VAT your will be charged by your suppliers and so could reclaim if you were VAT registered but also who your customers are and if you were VAT registered and charged them VAT on your goods or services what effect that would have on them and your competitiveness against others in your market place.
How does Amazon pay so little tax in the UK and can I do something similar to help my business?
However a business MUST register for VAT if:
- The business’ VAT turnover is more than £83,000 in a 12 month period
- you receive goods in the UK from the EU worth more than £83,000
- you expect to go over the £83,000 threshold in a single 30 day period
If you do not initially meet any of the above criteria then you do not have to register for VAT, however you can opt to voluntarily register if you so wish.
If you sell your goods and services across the EU, particularly online then there are other rules and regulations that you need to consider
Our article titled ‘If I sell online across the EU, are there any VAT issues’ goes through some of these issues.