When issuing invoices, it is important to apply the correct VAT treatment. In some cases, that means not charging VAT at all. Although most UK businesses charge VAT at the standard rate of 20%, there are other rates and categories that may apply. Understanding these distinctions can help you avoid costly errors and penalties.
In addition to the 20% standard rate, there is also reduced VAT rate (5%) and a zero VAT rate (0%). Even though zero-rated supplies are charged at 0%, they are still within the VAT system and must be recorded correctly on your VAT return.
There are two main categories where VAT is not charged: exempt supplies and supplies that fall outside the scope of VAT. Although no VAT is charged in either case, the rules and reporting requirements are different.
Exempt supplies are goods or services on which no VAT is charged. Common examples include insurance, postage stamps and health services provided by doctors. If your business only makes exempt supplies, you cannot register for VAT and you are not able to reclaim VAT on your business costs.
Supplies that are outside the scope of VAT fall completely outside the UK VAT system. In these cases, VAT cannot be charged and VAT on related costs cannot usually be reclaimed. Examples of supplies outside the scope include goods or services bought and used outside the UK, statutory fees such as the London Congestion Charge and goods sold as part of a private hobby.
If VAT has been charged incorrectly, the error must be corrected. The process for doing so depends on the amount involved and when the mistake occurred. Acting promptly can minimise disruption and potential penalties.
If you are unsure whether VAT should be charged on a particular supply, we would be happy to help guide you on this issue.
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