Value-added tax (VAT) is the tax incurred on goods and services throughout different production stages. However, the introduction of VAT cuts and VAT exemption for businesses means VAT will no longer apply or it is reduced for certain goods and services. Do you own a business in the UK and you are wondering why this happens? Just read on. In this article, you can learn everything about reduced-rate VAT and VAT exemption for businesses in the UK.
VAT Reduction & VAT Exemption: Definition
VAT reduction UK refers to a temporary or permanent reduction rate of VAT for certain goods and services. For instance, the standard rate of VAT your business in the UK pay on goods or services is 20%, but now, the government has imposed a reduced rate of about 5% which may apply to essential goods like supplies of hospitality, etc.
Has VAT been reduced? Yes, in the United Kingdom, the standard rate of VAT is 20% will be reduced to 5%. The temporary reduction of VAT rates was announced by the government in the March 2020 Budget, to take effect from 1 January 2021 until March 2021. According to the British Chancellor of the Exchequer, Rishi Sunak, this move is designed to protect 2.4 million jobs through the winter and to reduce the number of setbacks that small businesses experience. There is also the introduction of VAT exemption which means that the tax is not charged on certain vat exempt items during the intermediate phases between businesses or at the last phase which is sales to the consumer.
On the other hand, VAT exemption can refer to goods and services that are not subject to VAT. It can also refer to organizations that cannot register for VAT. For those goods and services that exempt from VAT, the business owner cannot reclaim any VAT on business expenses or purchases.
Coverage of VAT Cut & VAT Exemption
VAT reduction on goods and services
The standard rate of VAT in the UK is 20% until the government announced that it will reduce the VAT rate to 5% on certain goods. There are some goods and services on which VAT is reduced, including:
· Sanitary products
· VAT reduction on food items that are sold at restaurants and supermarkets, etc.
· Non-alcoholic drinks that are sold at pubs, cafes, etc.
· Holiday sleeping accommodation, including tents, hotels/pitch fees for caravans
What items are exempt from VAT?
If all the goods and services you sell are exempt from VAT, it means that your business will not be able to register for VAT.
Here is a list of goods and services showing which VAT rates are exempt:
· Education and training
· Insurance, credit, and finance
· Subscriptions to membership organizations
· Fundraising events by charities
· An exemption can be waived on selling, leasing, and letting of commercial land, and buildings
In the UK, VAT is not taxable on the aforementioned vat exempt items. Thus, sales of these exempt goods or services should not be included in your taxable turnover for VAT purposes.
NOTE: Buying exempt items means no VAT to reclaim.
Learn more: How to Add VAT? VAT Rates & Automation
What Is An Exempt Business?
Any business that only sells or supplies goods or services that are exempt from VAT is referred to as an exempt business.
An exempt business:
· cannot register for VAT
· cannot recover any VAT incurred on purchases or expenses
This is quite different from where you sell or supply zero-rated goods or services. In this case, you can reclaim the VAT on any purchases or expenses that relate to those sales.
NOTE: If your business is VAT-registered and you incur VAT on any items that will be used to make exempt supplies, then your business can be classified as partly exempt.
VAT Exemption vs. Zero-Rate VAT: Differences
A common question frequently asked by business owners when considering this sort of topic is: what do VAT reduction and exemption mean for Businesses? VAT exempt and zero-rate VAT is entirely different even if there is no extra charge incurred to the original sales price of either VAT-exempt or zero-rated products.
To help you better understand the difference between VAT exemptions and zero-rating supplies, there is a need to understand the different types of items with exceptions:
· Items with the right to deduct, for example, exports and intra-EU sales
· Items without the right to deduct, for example, most public goods and services
· Other exemptions, for example, certain imports, and intra-EU acquisitions
The summary of it all is that for zero-rated supplies, VAT is rated at - at 0% but for exempt items, VAT isn't added to the selling price. This rate differs from country to country. Take for example, in the UK, both food products and children's products are exempted from VAT but if you sell only zero-rated items, you don't have a hidden final tax,
Also, the sales of exempt products are only recorded in your company's account while sales of zero-rated products are recorded in your VAT accounts.
Technically, VAT-exempt is not taxable while zero-rated products are still taxable. What this means is that sales of zero-rated goods and services are considered part of your taxable turnover unlike sales of VAT-exempt products.
VAT partial exemption for businesses
In certain circumstances, some businesses might be considered to be partially exempt from VAT. Your business is partially exempt from VAT if it is registered for VAT and sells both VAT-exempt and taxable goods and services. If your business is operating as a VAT partial exemption, you can reclaim any VAT that is incurred when purchasing or producing the VAT-exempt goods or services that are sold to your customers.
Unlike VAT-exempt businesses, partially exempt businesses need to keep separate records for their VAT-exempt sales as well as provide records for how they calculated the VAT in the event of a reclaim using HMRC vat exemption form.
Call to Action
Understanding the VAT reduction UK and VAT-exempt for your business is crucial. For beginners, these procedures will help you clear some minor confusion circulating the internet. Find out more on VAT exemption certificate from guidance on gov.uk.
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