A guide to commonly used VAT terms in the UK

Understanding Value Added Tax (VAT) is crucial for business owners. However, this can be a real challenge if you’re unfamiliar with the various VAT terms relating to registration and compliance in the UK.

VAT is a specific type of consumption tax that VAT-registered businesses must add to the price of the goods and services they sell.

Our guide provides an overview of some of the most common VAT terms you’re likely to encounter. Hopefully, this information will make life a little easier as you navigate the endless guidance on the UK VAT system.

1. Accounting period

A VAT accounting period, or VAT period, is the time covered by a VAT Return. It’s usually 3 calendar months, with the deadline for submitting the VAT Return falling 1 calendar month and 7 days after the end of the accounting period. 

The rules are different for businesses that use the VAT Annual Accounting Scheme. The VAT accounting period is 12 months instead of 3, and the deadline for sending a VAT Return is 2 months after the end of the accounting period.

2. Acquisitions 

Acquisitions are goods that a business brings into Northern Ireland from an EU supplier. You might have to account for VAT in the UK on the acquisition of these goods. However, you can recover the VAT as input tax on your VAT Return, subject to HMRC’s normal rules for reclaiming input tax.

3. De minimis rule

This is one of the VAT terms that causes quite a bit of confusion. The de minimus rule is a principle of partial exemption from UK VAT. It is designed to save small businesses from the need to account for insignificant (‘de minimus’) amounts of VAT incurred (input tax) on costs relating to exempt supplies.

Normally, VAT-registered businesses cannot claim any of this input tax. However, under the de minimus rule, they can recover input tax that would not otherwise be deductible, provided that:

• their exempt input tax amounts to no more than £625 per month on average, and
• the total value of their exempt input tax is not more than 50% of the total input tax incurred in the relevant period

For more information on the de minimus rule, refer to HMRC’s guidance on partial exemption (VAT Notice 706).

4. Distance selling 

Distance selling refers to the sale of goods across an EU border where:

• the customer isn’t registered for VAT, and
• the supplier makes or facilitates the delivery of the goods

It applies to businesses that supply and deliver goods from Northern Ireland to a person in an EU Member State, from an EU Member State to a person in Northern Ireland, and between EU Member States

Distance sales customers are predominantly private individuals. However, they may also include small businesses that are not VAT registered, businesses making only exempt supplies, and charities and public bodies.

5. Exports

Exports are goods that businesses supply from England, Scotland, or Wales to customers outside the United Kingdom, or goods they supply from Northern Ireland to customers outside the European Union. The zero rate of VAT normally applies to exported supplies.

6. Input VAT 

Input VAT, commonly known as ‘input tax,’ is the VAT you pay when purchasing taxable goods and services. 

If your business is registered for VAT in the UK, you can offset the input tax you incurred in the period against the output tax you charged on sales during the same period. 

Moreover, you can claim the difference from HMRC if the input tax is more than the output tax. 

7. Imports

Imports are goods (and any related costs) your business brings into Great Britain (England, Scotland, or Wales) from suppliers outside the UK, or goods you bring into Northern Ireland from suppliers outside the EU. 

Imported goods are usually charged at the same VAT rates that would apply if they had been supplied in the UK. Subject to the normal rules, you can reclaim the VAT you paid on these goods as input VAT.

8. Output VAT 

Output VAT, officially known as ‘output tax’, is the tax that VAT-registered businesses charge on the taxable goods or services they sell.  

When you register for VAT, you essentially collect this tax on behalf of the government by applying the correct VAT rates to your sales prices.

Output VAT is then payable to HMRC after the end of each accounting period, less any input VAT your business has incurred on purchases from suppliers during the same period.

9. Place of supply 

The VAT term ‘place of supply’ refers to the location where a business makes a supply of goods or services and, consequently, where those goods or services are liable to VAT. 

There are different rules for working out the place of supply of goods and the place of supply of services. 

10. Reverse Charge 

The reverse charge relates to the supply of cross-border services from non-UK suppliers to UK businesses, with the exception of exempt supplies.

There is also the VAT domestic reverse charge. This is a procedure designed to combat tax fraud, which shifts the responsibility to report and pay VAT from the supplier to the recipient of the goods or services. 

11. Supply 

‘Supply’ is one of the easiest VAT terms to understand. It generally refers to the sale of goods or services (including barter). For the purposes of VAT, taxable supplies are the goods or services you sell (supply) in the UK that are not exempt from VAT. 

A supply of goods occurs when exclusive ownership of goods passes from one person to another. A supply of services occurs when someone provides a service in exchange for a consideration (i.e. payment; compensation). 

Taxable supplies

Taxable supplies include any goods and services on which the standard rate, reduced rate, or zero rate of VAT applies. These are known as standard-rated supplies, reduced-rate supplies, and zero-rated supplies. 

Other than exempt supplies, any supply you make is classed as a taxable supply, regardless of whether your business is registered for VAT. However, you don’t need to account for VAT on these supplies if they’re made at a time when you’re not required to register for VAT and you’ve not registered voluntarily. 

12. Tax point 

The tax point is a VAT term referring to the date when VAT becomes chargeable on a particular transaction. Also known as the ‘time of supply’, the tax point is not necessarily the date when the supply physically occurs. It usually depends on the following factors:

• Whether the business uses accrual accounting (aka invoice accounting) or cash accounting for VAT
• When the business supplies the goods or services to the customer
• When the business issues the VAT invoice to the customer

With cash accounting, the tax point is usually when the business receives payment from the customer. With accrual accounting, the tax point is normally when the business issues the invoice, even if this occurs before or after the supply physically takes place. 

You must account for VAT in the VAT accounting period in which the tax point occurs.

13. Taxable turnover 

Another VAT term you’ll hear often is ‘taxable turnover’. This refers to the total value of your taxable supplies, including all items you sell that attract the standard rate, reduced rate, and zero rate of VAT.

It doesn’t include income from the supply of exempt goods and services, items ‘out of scope’ for VAT, or the disposal of capital goods. 

Your taxable turnover determines whether or not your business must register for VAT and when it is eligible to seek cancellation of registration. You must register if the value of this turnover exceeds the VAT registration threshold in any 12-month period.

14. VAT exempt  

A business is VAT-exempt if it only supplies goods or services that are exempt from VAT and/or outside the scope of the VAT system. 

These types of business supplies do not attract VAT at the standard, reduced, or zero rates. As such, they do not form part of your taxable turnover for the purposes of VAT. 

If everything you sell is exempt or out of scope, you can’t register for VAT or recover the VAT you incur on business purchases and expenses.

You can apply for VAT exemption if most or all of the items you sell are zero-rated. However, by doing so, you won’t be able to reclaim any VAT on purchases and expenses. 

Partial VAT exemption applies to some businesses. Your business is partly exempt if you make (or intend to make) both taxable and exempt supplies and incur VAT on costs relating to both.

15. VAT number

A VAT number is a unique tax identification number that HMRC provides to VAT-registered businesses. It’s used for all matters relating to VAT registration, including:

• identifying the tax status of your business
• identifying the place of taxation
• reporting the VAT your business pays on purchases and collects on sales 
• enabling HMRC to track the amount of VAT a business collects from customers and pays to suppliers
• issuing VAT invoices to customers 

The format of VAT numbers in the UK is normally the prefix ‘GB’, followed by 9 digits, such as GB 123456790. 

However, if your business moves goods between Northern Ireland and the EU under the Northern Ireland protocol, your VAT number will have the prefix ‘XI’ instead. For example, XI 123456789. 

16. VAT rates

VAT rates are the official rates of Value Added Tax that VAT-registered businesses must charge on the taxable goods or services (‘supplies’) they sell. They are charged as a percentage of a product’s sale price.

There are three different rates of VAT that apply to taxable supplies in the UK:

• Standard rate of 20% – this applies to most goods and services
• Reduced rate of 5% – this applies to certain goods and services, such as children’s car seats and home energy
• Zero rate of 0% – this applies to essential goods, including most food items, books, and children’s clothing

17. Effective date of registration 

This is the date your business becomes liable to register for VAT. It is determined by the date you exceed or realise you will exceed the compulsory VAT registration threshold (currently £90,000).

If you register for VAT because your taxable turnover has exceeded the threshold in the past 12 months, your effective date of registration will be the first day of the second month after your VAT-taxable supplies go over the threshold. 

• Pros and cons of voluntary VAT registration

If you register because you expect your taxable turnover to go over the threshold in the next 30 days, the effective date of registration will be the date when you first realised this was going to happen. 

When registering for VAT voluntarily, you choose the date from which you wish to be registered. 

18. VAT Return 

As a VAT-registered business, you must submit a VAT Return to HMRC at the end of each VAT accounting period. This is a form that shows the amount of output tax you owe on sales minus the amount of input tax you incurred on purchases during that period.

• How to submit a VAT Return

VAT returns are normally due quarterly (i.e. every three months), so four returns per year. However, some businesses choose to send monthly returns. There’s also the option to send only one VAT Return per year if you join the Annual Accounting Scheme.

19. VAT schemes

Several VAT schemes are available from HMRC. These are designed to simplify the process for VAT-registered businesses when calculating and accounting for VAT to HMRC.

There are three accounting schemes you may be eligible to join:

• Flat Rate Scheme 
• Annual Accounting Scheme 
• Cash Accounting Scheme

Eligibility depends on your VAT-taxable turnover and the type of business you have. All of these schemes are voluntary to join. 

Other schemes to be aware of are the VAT margin scheme and the VAT retail schemes. These are available to retail businesses and those selling second-hand goods.

20. VAT thresholds

There are various VAT thresholds to be aware of. These are the registration threshold, deregistration threshold, distance selling threshold, and accounting scheme thresholds. 

The VAT registration threshold is the amount of taxable turnover a business can earn within a 12-month period before it’s required to register for VAT. It is currently £90,000.

• What is the VAT registration threshold in the UK?

The VAT deregistration threshold represents the point at which a VAT-registered business may be eligible to cancel its registration. It is currently £88,000 (or £90,000 for businesses in Northern Ireland).

If your business sells goods from Northern Ireland to customers in the EU and the total value of those sales exceeds £8,818, you must pay VAT in the country where you send the goods. This is the distance selling threshold. 

There are also thresholds for joining and leaving the various VAT schemes available from HMRC. 

Thanks for reading

We hope you’ve found this guide to common UK VAT terms helpful. Please comment below if you have any questions—and be sure to explore the 1st Formations Blog for more business advice and limited company guidance.