Value added tax, part 1

This two-part article is relevant to those of you sitting the TX-UK exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).

The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.

Standard rate of value added tax (VAT)

The standard rate of VAT is currently 20%.


VAT registration

A business making taxable supplies must register for VAT if during the previous 12 months the value of taxable supplies exceeds £85,000. However, VAT registration is not required if taxable supplies in the following 12 months will not exceed £83,000. These figures are exclusive of VAT. And remember that both standard rated and zero-rated supplies are taxable supplies.


A business must also register for VAT if there are reasonable grounds to believe that taxable supplies will exceed £85,000 during the following 30 days. Again, the figure is exclusive of VAT.


If a business continues to trade after the date when it should have registered for VAT, output VAT will still be due from this date.

It is important that you appreciate the distinction between making standard rated supplies, zero-rated supplies and exempt supplies. Only standard rated supplies and zero-rated supplies are taxable supplies.


Voluntary VAT registration

A business may decide to voluntarily register for VAT where taxable supplies are below the £85,000 registration limit, or where it is possible to apply for exemption. This will be beneficial when:

  • The business makes zero-rated supplies. As seen in example 4, output VAT will not be due but input VAT will be recovered.
  • The business makes supplies to VAT registered customers. Input VAT will be recovered and it should be possible to charge output VAT on top of the pre-registration selling price. This is because the output VAT will be recovered (as input VAT) by the customers.

However, it will probably not be beneficial to voluntarily register for VAT where customers are members of the general public, since such customers cannot recover the output VAT charged. If selling prices cannot be increased, the output VAT will become an additional cost for the business.


Whether or not output VAT can be passed on to customers is also an important factor when deciding whether to remain below the VAT registration limit, or whether it is beneficial to accept additional work which results in the limit being exceeded.


Pre-registration input VAT

Input VAT incurred prior to registration can be recovered in certain circumstances.


VAT deregistration

A business stops being liable to VAT registration when it ceases to make taxable supplies. HMRC must be notified within 30 days, and the business will then be deregistered from the date of cessation or from an agreed later date. 

A business can also request voluntarily VAT deregistration.

There is a deemed supply of business assets such as plant, equipment and inventory when a business ceases to be registered for VAT. 

However, the transfer of a business as a going concern does not normally give rise to any VAT implications.


Group VAT registration

Two or more companies can register as a group for VAT purposes if they are under common control (such as a parent company and its subsidiary companies) and each of them is resident in the UK.

A VAT group is treated for VAT purposes as if it was a single company registered for VAT on its own. Group VAT registration is made in the name of a representative member, and this company is then responsible for completing and submitting a single VAT return and paying VAT on behalf of the group. However, all the companies in the VAT group remain jointly and severally liable for any VAT liabilities.


The tax point

It is very important to correctly identify the date of supply or tax point, as this determines when output VAT will be due.


With the supply of services there may be more than one tax point.


Output VAT and input VAT

There are several important points regarding output VAT and input VAT which should be remembered:

  • For VAT purposes there is no distinction between revenue and capital expenditure or income as there is for income tax and corporation tax.
  • Output VAT is charged on the actual amount received where a discount is offered for prompt payment. The supplier therefore has to either provide details of the potential discount on the sales invoice, or issue a subsequent credit note for the discount.
  • Relief for an impairment loss is only available if the claim is made more than six months from the date when payment was due and the debt has been written off in the business’s books.
  • Input VAT cannot be recovered in respect of business entertainment (unless it relates to the cost of entertaining overseas customers) or the purchase of a car (unless the car is used 100% for business purposes).
  • Output VAT is charged where goods are taken from a business for non-business purposes, and similarly where services are used for non-business purposes.
  • An apportionment is made where goods or services are used partly for business purposes and partly for private purposes.


The refund of VAT which has been overpaid is normally subject to a four-year time limit.


Goods supplied free of charge

When goods are supplied free of charge, output VAT must normally be accounted for on the cost of the goods. However, there is an exemption for the gift of goods where the cost of the gifts does not exceed £50 per customer over a 12-month period.

Free samples given to customers are not treated as a supply of goods for VAT purposes, so no output VAT will be due.

Car expenses

Provided there is some business use, the full amount of input VAT can be reclaimed in respect of repairs.

Where fuel is provided all the input VAT (for both private and business mileage) can be recovered, but the private use element is then normally accounted for by way of an output VAT scale charge. This is based on the car’s CO2 emissions, and will vary according to the length of the VAT period. The scale charge can apply to sole traders, partners, employees or directors. The scale charge will be given to you in the exam if required.


However, if an employee or director is charged the full cost for the private fuel provided, output VAT will instead be calculated on this charge to the employee or director.


Where a leased car is available for private use, 50% of input VAT on leasing costs is non-deductible.


The second part of the article will cover VAT returns, VAT invoices, penalties, overseas aspects of VAT and special VAT schemes. It also includes a test of your understanding.

Written by a member of the TX-UK examining team