Worldwide VAT, GST and Sales Tax Guide
Birmingham GMT
EY
1 Colmore Square
Birmingham B4 6HQ
England
Indirect tax contact
Carolyn Norfolk
+44 (12) 2339-4646 carolyn.norfolk@uk.ey.com
Cambridge GMT
EY
1 Cambridge Business Park Cowley Road Cambridge CB4 0WZ England
Indirect tax contact
Carolyn Norfolk
+44 (12) 2339-4646 carolyn.norfolk@uk.ey.com
Edinburgh GMT
EY
Atria One 144 Morrison Street
Edinburgh EH3 8EX
Scotland
Indirect tax contact
Stewart Mathieson
+44 (191) 247-2761 smathieson@uk.ey.com
Glasgow GMT
EY
G1 Building 5 George Square Glasgow G2 1DY
Scotland
Indirect tax contact
Stewart Mathieson
+44 (191) 247-2761 smathieson@uk.ey.com
Leeds GMT
EY
1 Bridgewater Place Water Lane Leeds LS11 5QR
England
Indirect tax contact
Andy Jones
+44 (113) 298-2344 andy.jones@uk.ey.com
customs declarations, checking whether imported goods are eligible for staged import controls and obtaining relevant Economic Operator Registration Identification (EORI) numbers.
An EORI number is used by tax authorities to identify a business for customs purposes. Businesses may need more than one EORI number depending on where they are moving goods. An EU EORI number is required to: import and export goods into and out of the EU 27; a GB EORI number (separate from its EU EORI number) is required to import into or export from GB; and in some scenarios, an EORI number starting with XI may be required to move goods into NI from GB, move goods from NI to another non-EU country, make a declaration in NI or apply for a customs decision in NI. However, businesses do not need an EORI number that starts with XI if an EU EORI number is already held, goods are only moved on the island of Ireland or between NI and an EU country or the business is “established” in an EU country but not in NI (in the latter case, an EU EORI number is required).
Postponed import VAT accounting. Postponed import VAT accounting (PVA), where import VAT is accounted for on the VAT return can be used by businesses if goods are imported into GB from anywhere outside the UK or into NI from outside the UK and EU. PVA can also be used for goods moved between GB and NI that are declared into a customs special procedure when they are removed from that special procedure.
Tax representatives. If a business is not established in the UK, a third party established in the UK must deal with any customs formalities on behalf of the business. Non-established taxable persons can have their nominated intermediary account for import VAT on the intermediary’s VAT return.
In addition, a non-established taxable person can nominate an intermediary who will be able to account for the import VAT on its VAT return. Businesses do not need to be authorized to use postponed import VAT accounting.
In GB, appointing a fiscal representative for UK established entities is not a legal requirement; however, HMRC may request the use of one in special cases. Appointing a VAT fiscal representative for customs purposes may be necessary for non-UK established businesses to act as the importer of record in the UK.
Exports. To export goods to EU countries, GB businesses must have a GB EORI number.
Services. From a services perspective, the UK is a non-EU country and the application of use and enjoyment rules, which vary by Member State, will apply differently (see the Effective use and enjoyment section for further details). In addition to use and enjoyment changes, certain supplies of services to nonbusiness customers outside the UK have seen a shift in the place of supply to where the customer belongs. The services affected by the latter are: transfer and assignment of copyrights or patents, etc., (business-to-consumer (B2C) only); advertising services (B2C only); consultants, lawyers, accountants, engineers, etc., (B2C only); banking, financial and insurance (B2C only); the provision of access to, or transmission or distribution through, a natural gas system; an electricity system or a network through which heat or cooling is supplied (B2C only); supply of staff (B2C only); letting on hire of goods other than means of transport (B2C only) and emissions allowances.
VAT registration. Certain VAT registrations are no longer available post-Brexit, including UK Mini One-Stop Shop registrations for GB businesses and UK distance selling registrations for GB businesses. Distance selling still operates in NI after 1 July 2021, when new rules were introduced, albeit with a change in threshold.
Input tax recovery. Businesses are (subject to the normal rules) able to reclaim input tax attributable to the export of certain financial services products to the EU (as is the case for those exports to non-EU countries).
The EU customer can recover this “import VAT” using the EU refund scheme if it is not registered in the UK (or on its UK return if VAT registered).
Goods sold between GB to NI and within NI by members of a UK VAT group. UK VAT groups continue to operate largely as they did pre-Brexit. VAT groups will continue to be able to include members that are established in NI as well as members that are established in GB. However, there are several changes to the way in which a VAT group will operate when the group moves goods from GB to NI or where goods in NI are sold between members.
Supplies of goods between VAT group members are usually disregarded. However, where goods are supplied by members of a VAT group and they move from GB to NI, VAT will need to be accounted for on that movement in the same way as a movement of own goods.
If supplies are made between members of a VAT group and the goods are in NI at the time of supply, the transaction is only disregarded if both members are established or have a fixed establishment in NI. If one or both have establishments in GB, the supply cannot be disregarded, and VAT must be accounted for by the representative member of the VAT group. VAT charged may be recoverable subject to the normal rules.
Goods sold onboard ferries between GB and NI. These will continue to be taxed domestically. UK VAT will be due and this will be accounted for on the seller’s UK VAT return.
Where goods are sold on journeys that visit GB and NI as part of a voyage to third countries, the supply will be treated as taking place outside the UK and so are outside the scope of UK VAT.
Where goods are sold on journeys between NI and an EU Member State, these will be taxed in the place of departure, as now. UK VAT would therefore be due where the journey departs from NI.
Services. There are no special VAT rules for services between NI, GB and the EU. See the Services subsection above under the Brexit – Great Britain section.
VAT registration. NI is, and remains, part of the UK’s VAT system. Businesses trading under the Northern Ireland Protocol will need to put an “XI” prefix in front of the UK VAT number when communicating with an EU customer or supplier (invoices will show an XI number ahead of the VAT number – for example, XI 123456789 – instead of GB); and complete an EC Sales List when selling goods from NI to VAT-registered customers in the EU (a notification to HMRC is required before the XI prefix is used.) Businesses are trading under the Northern Ireland Protocol where:
• Goods are in NI at the time of sale.
• Goods are received in NI from VAT-registered EU businesses for business purposes.
• Goods are sold or moved from NI to an EU Member State.
IntraEU simplifications. Simplifications, such as triangulation, will not be available for movements of goods involving GB.
Such simplifications will be available for movements of goods involving EU Member States and NI or where the intermediary is identified as moving goods in, from or to NI in the course of its business.
Margin Scheme. In line with EU rules, margin schemes involving goods, such as the secondhand margin schemes, will not usually apply for sales in NI where the stock is purchased in GB (however, see below for an exception for cars). The VAT on these sales will be subject to the normal rules and must be accounted for on the full value of the supply.
Margin schemes remain available for sales of goods that are purchased in NI or the EU, whether sold to customers in NI, GB or the EU. Margin schemes also remain available for sellers in GB selling stock originally purchased in NI or GB, selling to those in GB.
Other services affected by Brexit may include certain supplies of services to nonbusiness customers outside the UK, which will see a shift in the place of supply to where the customer belongs: this is due to the effect of the term “which is not a Member State (other than the Isle of Man)” being substituted by the term “other than the United Kingdom or the Isle of Man” in Schedule 4A, Paragraph 16 (1)(b) VATA 1994. The services affected are as follows:
• Transfer and assignment of copyrights or patents, etc., (business-to-consumer (B2C) only)
• Advertising services (B2C only)
• Consultants, lawyers, accountants, engineers, etc., (B2C only)
• Banking, financial and insurance (B2C only)
• The provision of access to or transmission or distribution through a natural gas system
• An electricity system or a network through which heat or cooling is supplied (B2C only)
• Supply of staff (B2C only) and letting on hire of goods other than means of transport (B2C only)
Transfer of a going concern. Normally the sale of the assets of a VAT registered or VAT-registrable business will be subject to VAT at the appropriate rate. However, a transfer of a business as a going concern (TOGC) is the sale of a business, including assets that must be treated as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions. Where the sale meets the conditions, the supply is mandatorily outside the scope of UK VAT.
For there to be a TOGC for VAT purposes in the UK, all the following conditions must apply:
• The assets, such as stock-in-trade, machinery, goodwill, premises and fixtures and fittings, must be sold as part of the TOGC.
• The buyer must intend to use the assets in carrying on the same kind of business as the seller.
• Where the seller is a taxable person, the buyer must be a taxable person already or become one as the result of the transfer.
• In respect of land or buildings that would be standard rated if they were supplied, the buyer must notify HMRC that they have opted to tax the land by the relevant date and must notify the seller that their option has not been disapplied by the same date.
• Where only part of the business is sold it must be capable of operating separately.
• There must not be a series of immediately consecutive transfers of the business.
Transactions between related parties In the UK, for a transaction between related parties, the value for VAT purposes is calculated at the open market value. Special valuation rules apply for the following:
(a) The value of a supply made by a taxable person for a consideration in money is (apart from this paragraph) less than its open market value.
(b) The person making the supply and the person to whom it is made are connected.
(c) If the supply is a taxable supply, the person to whom the supply is made is not entitled to credit for all the VAT on the supply.
HMRC may direct that the value of the supply shall be taken to be its open market value. A direction shall be given by notice in writing to the person making the supply, but no direction may be given more than three years after the time of supply.
C. Who is liable
A “taxable person” is any entity or person that is required to be registered for VAT. The term includes any entity or individual that makes taxable supplies of goods or services, intra-Community acquisitions (relevant only in NI) or distance sales in the UK in the course of a business in excess of the relevant turnover thresholds.
The VAT registration threshold is GBP90,000. This VAT registration threshold only applies to businesses established in the UK. A nil registration threshold applies to businesses not established in the UK. As a result, any non-established business that makes a taxable supply (not
corporate group, and where the corporate group members consume that supply. When making a supply to which the domestic reverse charge applies, the supplier must show all the information normally required to be shown on a VAT invoice. The supplier must also annotate the invoice to make it clear that the domestic reverse charge applies, and the customer is required to account for the VAT. No additional notification or reporting requirements apply to these transactions.
Domestic supplies of mobile phones and computer chips. Purchasers of certain designated goods (broadly, mobile phones and computer chips) must account for the VAT due under a domestic reverse-charge accounting procedure, rather than paying the VAT to the supplier. The domestic reverse charge applies for supplies greater than GBP5,000 (exclusive of VAT). When making a domestic sale to which reverse-charge accounting applies, the supplier must show all the information normally required to be shown on a VAT invoice. The supplier must also annotate the invoice to make clear that the reverse charge applies, and that the customer is required to account for the VAT.
Domestic supplies of emissions allowances. Purchasers of specified emissions allowances must account for VAT under a domestic reverse-charge accounting procedure, rather than paying VAT to the supplier. When making a domestic sale of emissions allowances to which reverse-charge accounting applies, the supplier must show all the information normally required to be shown on a VAT invoice. The supplier must also annotate the invoice to make it clear that the reverse charge applies, and that the customer is required to account for the VAT.
Domestic wholesale supplies of gas and electricity. Purchasers of wholesale supplies of gas and electricity are required to account for VAT under a domestic reverse-charge accounting procedure, rather than paying VAT to the supplier. The domestic reverse charge does not apply to supplies of gas and electricity made under supply license or metered arrangements to residential and business premises (supplies for consumption). VAT-registered businesses that do not resell or trade the gas or electricity are not affected. When making a supply to which domestic reversecharge accounting applies, the supplier must show all the information normally required to be shown on a VAT invoice. The supplier must also annotate the invoice to make it clear that the domestic reverse charge applies, and that the customer is required to account for the VAT.
Domestic B2B supplies of construction services. The domestic reverse charge applies to standard (20%) or reduced rate (5%) supplies of building and construction services, where payments are required to be reported through the Construction Industry Scheme (CIS). Therefore, supplies between subcontractors and contractors (i.e., B2B supply), as defined by the CIS, will be subject to the reverse charge unless they are supplied to a contractor who is an end user.
Digital economy. Ecommerce changes. The UK introduced changes to the VAT rules relating to e-commerce sales effective 1 January 2021. These changes are similar to the EU e-commerce VAT changes, which were implemented from 1 July 2021, For an overview of the EU ecommerce changes, see the EU chapter. In GB, these changes came into effect from 1 January 2021. Although NI follows EU VAT rules for goods, it has released separate guidance relating to e-commerce. As a result, we have highlighted the differences in the NI treatment where applicable. The UK changes coincide with the removal of the low value consignment relief in the UK.
Import of lowvalue goods for sales to customers in GB and NI. From 1 January 2021, the lowvalue consignment relief (LVCR), which relieved import VAT on consignments of goods valued at GBP15 or less, was removed for goods imported from outside the UK. Further, the EU VAT distance selling regime no longer applies to the sale of goods to customers in GB from 1 January 2021.
As a consequence of the above changes, VAT is chargeable on all imports into GB (including imports from the EU) and NI. However, different VAT rules apply to the import of goods in consignments valued at GBP135 or less and consignments valued at more than GBP135.
For non-excisable goods imported from outside GB and NI in consignments not exceeding GBP135 in value, the goods will no longer be subject to import VAT. Instead, VAT will be applied at the point of sale. These rules apply irrespective of the place of establishment of the supplier. If the supplier making such imports is not registered for VAT in the UK, from 1 January 2021 they would be required to obtain UK VAT registration for such imports. If the supplier is making imports in NI, then they would also be eligible to use the Import One-Stop-Shop scheme to account for this VAT in NI.
Similar rules apply to both B2B and B2C transactions involving imports into GB and NI. However, if the customer provides the supplier with a UK VAT registration number, then the customer is required to self-assess VAT under the reverse-charge mechanism.
Import OneStop Shop. The Import One-Stop Shop (IOSS) may be used by non-EU businesses making consignments of less than EUR150 to customers in the EU and NI. Local VAT registrations may still be appropriate for consignments over EUR150 to facilitate returns and to avoid the need for the customer to act as importer.
Online marketplaces and platforms. There is a distinction for sales of goods to customers in GB and NI and specific rules for joint and several liability of vendors and online marketplaces.
• Sales of goods to GB customers through online marketplaces. Starting from 1 January 2021, if an online marketplace (OMP) facilitates the B2C sales of goods by sellers, the OMP is treated as the deemed supplier of the goods for VAT purposes under the following two scenarios: – Goods imported from outside GB into GB in consignments not exceeding GBP135 in value for sales to customers.
– Goods located in GB at the point of sale and are owned by a supplier established outside the UK.
In the above scenarios, the OMP is liable to account for VAT as a deemed supplier regardless of its place of establishment. In the above cases, if the customer is VAT registered and it has provided its UK VAT registration number to the OMP, then the OMP is not viewed as a deemed supplier.
The term OMP has been defined as “a website or any other means by which information is made available over the internet, which facilitates the sale of goods through the website or other means by persons other than the operator (whether or not the operator also sells goods through the marketplace).” The term “operator” is defined as “the person who controls access to, and the contents of, the online marketplace,” provided that the person is involved in all the following:
– Determining any terms or conditions applicable to the sale of goods
– Processing or facilitating the processing of payment for the goods
– The ordering or delivery or facilitating the ordering or delivery of the goods
• Sales of goods to NI customers through online marketplaces. Where an OMP facilitates the B2C sales of goods by sellers, the OMP is treated as a deemed supplier for VAT purposes, but only in the following three scenarios:
– Where goods are imported from outside of the UK and EU into NI in consignments not exceeding GBP135.
– Where goods located in GB are supplied to NI and are owned by an overseas seller (i.e., based outside of the UK).
Or
– Where goods located in NI are supplied to GB and they are owned by an overseas seller (i.e., based outside of the UK).
The only exception to the above rules is in circumstances where the customer is VAT registered, and it has provided its UK VAT registration number to the OMP. The OMP is not liable for UK VAT on the sale of goods that are in NI at the point of sale and that are sold domestically in NI.
• Transport services
• Exports of goods and related services
• Certain international services
• Intra-Community supplies of goods
• Services supplied to customers outside the EU
• Installation of certain energy-saving materials in residential accommodation in GB from 1 April 2022 to 31 March 2027 and in NI from 1 May 2023 to 31 March 2027
• Women’s sanitary products (the scope was extended to include reusable period underwear from 1 January 2024)
Examples of goods and services taxable at 5%
• Fuel and power supplied to domestic users and charities
• Installation of certain specified energy-saving materials in residential buildings in GB before 1 April 2022 and in NI before 1 April 2022 until 30 April 2023 (from 1 April 2027, the 5% rate will apply again in NI and GB)
Building materials for certain residential conversions
• Sanitary protection products
• Children’s car seats
• Smoking cessation products
• Grant-funded installation of heating appliances and qualifying security goods
• Certain larger holiday caravans
• Small, cable-based passenger transport systems
The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods and services
• Betting and gaming
• Education (with the exception of VAT being applied to private school fees from 1 January 2025 – see above)
• Finance
• Insurance
• Land and buildings (in most cases)
• Postal services (in most cases)
• Human blood products
• Medical services
• Shared service arrangements in circumstances in which two or more organizations (whether businesses or otherwise) with exempt and/or nonbusiness activities join together on a cooperative basis to form a separate, independent entity (a cost-sharing group), to supply themselves with certain services at cost (the VAT cost-sharing exemption applies only in very specific circumstances and does not cover all shared-service arrangements)
Option to tax for exempt supplies. The UK operates an option to tax in respect of land and buildings. However, certain supplies of land and buildings are not affected by an option to tax (generally buildings intended for residential use or a qualifying charitable use).
E. Time of supply
The time when VAT becomes due is called the “time of supply” or “tax point.” The “basic” tax point under UK law is the point when the goods are either removed from the supplier’s premises or made available to the customer, or when the services are performed.
The basic tax point may be overridden by the creation of what is termed an “actual” tax point. An “actual” tax point occurs in the following circumstances:
• Before the basic tax point: if the supplier issues a VAT invoice or receives payment with respect to a supply, a tax point is created to the extent covered by the invoice or payment (whichever is earlier).
• After the basic tax point: if an invoice is issued within 14 days after the basic tax point, the date of the invoice becomes the tax point. Taxable persons may request permission to extend this 14-day invoicing tax point up to a maximum of 30 days after the basic tax point.
When the amount of VAT to be charged on a supply goes up or down, UK law allows businesses to choose to charge VAT using the basic tax point (i.e., for discrete supplies the date at which the goods are removed, or services performed) rather than the actual tax point (for discrete supplies the date payment has been received or a VAT invoice issued). If a tax invoice has been issued and a lower VAT rate is applied, a credit note must be issued within 45 days of the VAT rate change.
For continuous supplies, there is a tax point every time a VAT invoice is issued, or a payment is received, whichever happens first, so opportunities for using the basic tax point when there is a VAT rate changes may be more limited.
Deposits and prepayments. The receipt of a deposit or prepayment normally creates an actual tax point if the amount is paid in the expectation that it will form part of the total payment for a particular supply. A tax point is created only to the extent of the payment received.
The unfulfilled supplies prepayment rules mean that all prepayments for goods and services are brought into the scope of VAT where customers have failed to collect what they have paid for and have not received a refund.
Continuous supplies of services. If services are supplied continuously and payment is made periodically, a tax point is created each time a payment is made or a VAT invoice is issued, whichever occurs earlier.
Goods sent on approval or for sale or return. The tax point for goods sent on approval or sale or return is the earlier of the date on which the goods are accepted by the customer or 12 months after the removal of the goods from the supplier. However, if a VAT invoice is issued before these dates, the invoice creates an actual tax point, up to the amount invoiced.
Reverse-charge services. The tax point for reverse-charge services is governed primarily by when the service is performed, and a distinction is made between single and continuous supplies. For single supplies, the tax point is the earlier of the date of completion of the service or the date of payment for the service. For continuous supplies, the tax point is the end of each billing or payment period (or the date of payment, if earlier). For continuous supplies that are not subject to billing or payment periods, the tax point is 31 December each year unless a payment has been made before that date, in which case the payment creates a tax point.
Leased assets. Under current UK VAT law, operational and finance asset leases are treated as continuous supplies of services (see above), provided that legal title to the goods does not pass to the recipient and there is no express contemplation that title will transfer at some point in the future. Goods supplied on terms that expressly contemplate that title will transfer at some point in the future (e.g., under hire-purchase or conditional sale agreements) are treated in the same way as a normal sale of goods where title passes at the outset. Unless a VAT invoice is issued, the time of supply will be linked to the basic tax point (see above). This means that the full amount of VAT will become payable up front, instead of being due as and when installment payments are made.
Imported goods. The time of supply for imported goods is the date of importation or the date on which the goods leave a duty suspension regime. Postponed import VAT accounting may be used for GB and NI imports by UK VAT-registered businesses.
Intra-Community acquisitions. The time of supply for an intra-Community acquisition of goods in NI (not applicable in GB) is the 15th day of the month following the month in which the goods are removed (that is, sent to, or taken away by, the customer). However, if the supplier issues an invoice before this date, the tax point is when the invoice is issued.
Intra-Community supplies of goods. For intra-Community supplies of goods in NI (not applicable in GB) the time of supply is the earlier of the 15th day of the month following the month in which the goods are removed or the date of issuance of a VAT invoice.
Distance sales. The time of supply for supplies of distance sales in NI (not applicable in GB) is the 15th day of the month following the month in which the goods are removed (that is, sent to, or taken away by, the customer). However, if the supplier issues an invoice before this date, the tax point is when the invoice is issued.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. A taxable person generally recovers input tax by deducting it from output tax, which is VAT charged on supplies made. Where input tax exceeds output tax in any period, the taxable person will receive a refund.
Input tax includes VAT charged on goods and services supplied in the UK, VAT paid on imports of goods into the UK and VAT self-assessed on the intra-Community acquisition of goods (NI) and reverse-charge services (see the EU chapter).
A valid tax invoice or customs document must generally accompany a claim for input tax.
A monthly Postponed Import VAT Statement (MPIVS) (available online) will form the primary evidence for input tax recovery for imports when using the Customs Declaration Service (CDS). The MPIVS will be published online via the taxable person’s tax account and the UK VATregistered importer will have access to the statement as soon as it is published. Pre-30 September 2022, if the business used the Customs Handling of Import and Export Freight (CHIEF) service, a C79 certificate should have been sent to the business in the post and is required as evidence to support VAT deduction.
See the section above for goods sold between GB and NI (no import VAT certificate is required).
The time limit for a taxable person to reclaim input tax in the UK is four years. The time limit for deducting input tax starts to run from the due date for the return that the business is liable to make after it has both incurred the input tax and received the VAT invoice. If the taxable person does not account for input tax in the appropriate period, this is an error, and the taxable person may be required to make an error correction notification. Input tax cannot be claimed more than four years after the date by which the return for the first period in which input tax could be claimed is required to be made (arguably this restriction does not apply unless the taxable person holds the invoice or the document that may be considered to serve as an invoice).
Special rules apply to the recovery of input tax on expenditure incurred before registration and after deregistration.
Nondeductible input tax. Input tax may be recovered only on purchases of goods and services that are used for business purposes (this excludes, for example, goods acquired for private use by an entrepreneur). However, input tax may not be recovered on some items of business expenditure.
The following lists provide some examples of items of expenditure for which input tax is not deductible and examples of items for which input tax is deductible if the expenditure is related to a taxable business use.
Examples of items for which input tax is nondeductible
• Purchase of a car (unless the car is available exclusively for business use)
• 50% of VAT incurred on the rental or lease of a car used for mixed business and private purposes
• Private expenditure
• Business entertainment and hospitality (except if provided to overseas customers)
• Import VAT where the taxable person is not the owner of the relevant goods
Examples of items for which input tax is deductible (if related to a taxable business use)
• Conferences, exhibitions, training and seminars
• Taxi services
• Restaurant expenses for employees
• Accommodation
• Motoring expenses and fuel for business purposes (subject to specific rules)
• Business use of a home telephone
Partial exemption. Input tax directly related to making exempt supplies is generally not recoverable. If a taxable person makes both exempt and taxable supplies, it may not recover its input tax in full. This situation is referred to as “partial exemption.”
A UK taxable person that makes both taxable and exempt supplies may calculate the amount of input tax it may recover in several ways. The standard partial exemption calculation method consists of the following two-stage calculation:
• The first stage identifies the input tax that may be directly allocated to taxable and to exempt supplies. Input tax directly allocated to taxable supplies is deductible, while input tax directly related to exempt supplies is not deductible. Supplies that are exempt with credit are treated as taxable supplies for these purposes.
• The second stage identifies the amount of the remaining input tax (for example, input tax on general business overhead) that may be allocated to taxable supplies and recovered. The amount of recoverable VAT is determined by making a pro rata calculation based on the respective values of taxable and exempt supplies made.
If the standard calculation method gives an unfair or distortive result, a special calculation method may be agreed with the UK VAT authorities. Approval from the tax authorities is not required to use the partial exemption standard method in the UK. A business must use the standard method, unless HMRC has given approval to operate a special method. However, in some cases, the UK VAT authorities may impose the use of a special calculation method.
Capital goods. Capital goods are items of capital expenditure that are used in a business over several years. Input tax is deducted in the VAT year in which the goods are acquired. The amount of input tax deductible depends on the taxable person’s partial exemption recovery position in the VAT year of acquisition. However, the amount of input tax recovered for capital goods must then be adjusted over time if the taxable person’s partial exemption recovery percentage changes during the adjustment period.
In the UK, the capital goods adjustment scheme applies to the following assets for the number of years indicated:
• Land and buildings and related property expenditure valued at GBP250,000 or more: adjusted over a period of 10 years.
• Computer hardware valued at GBP50,000 or more: adjusted over a period of five years.
• Ships and aircraft valued at GBP50,000 or more: adjusted over a period of five years.
The adjustment is applied each year following the year of acquisition to a fraction of the total input tax incurred (1/10 for land and buildings and 1/5 for computer hardware, ships and
H. Invoicing
VAT invoices. A UK taxable person must generally provide a VAT invoice for all taxable supplies made to other taxable persons, including exports and intra-Community supplies (see the EU chapter). Invoices are not automatically required for retail transactions, unless requested by the customer.
A VAT invoice is required to support a claim for input tax deduction.
Credit notes. A VAT credit note may be used to reduce the amount of VAT charged on a supply. The credit note must reflect a genuine mistake, an overcharge or an agreed reduction in the value of the original supply.
Where a change in consideration is agreed by a supplier and customer (e.g., faulty goods) after the original date of supply and VAT has been accounted for in an earlier period, a VAT adjustment can only be made where a credit/debit note is issued within 14 days and, in the case of a reduction in consideration, a “payment” has been made. The credit note should also refer to the number and date of the original VAT invoice. Where a VAT invoice is not required to be issued in the first place (e.g., retail customer), a debit/credit note will not be required.
Electronic invoicing. Electronic invoicing is allowed in the UK, but not mandatory, except for requirements set by NHS England for its sup-pliers, who must use the PEPPOL standard. Other than NHS suppliers, there is no threshold that requires taxable persons to adopt electronic invoicing in the UK. In February 2025, HMRC and the Department for Business and Trade launched a joint consultation on e-invoicing. The purpose of the consultation is to seek input on how the government can support the increased adoption of e-invoicing and looks to explore: different models of e-invoicing; whether to take a mandated or voluntary approach to e-invoicing; what scope of mandate might be most appropriate in the UK and for businesses; and whether e-invoicing should be complemented by real-time digital reporting. The consultation will close on 7 May 2025, after which time responses will be collated and used to determine next steps. There is no timeline indicated within the consultation for implementation.
Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is allowed but not mandatory in the UK. This is in line with EU Directive 2010/ 45/EU and 2014/55/EU (see the EU chapter) There is no threshold that require taxable persons to adopt electronic invoicing in the UK. The requirements related to electronic invoicing are the same as those for paper invoicing.
For the EU VAT in the Digital Age (ViDA) proposals, refer to the EU chapter.
Simplified VAT invoices. There is no requirement to issue a VAT invoice for retail supplies to unregistered businesses. Retailers may assume that no VAT invoice is required unless a customer asks for one in which case, if the charge made for the individual supply is:
• GBP250 or less (including VAT), an invoice can be issued showing the retailer’s name, address and VAT registration number, the time of supply (tax point), a description that identifies the goods or services supplied, and for each VAT rate applicable; the total amount payable, including VAT shown in GBP and the VAT rate charged. Exempt supplies must not be included on this type of VAT invoice.
• More than GBP250, then either a full VAT invoice or a modified VAT invoice must be issued, showing VAT inclusive rather than VAT exclusive values.
If the taxable person is not a retailer, and the total value of the supply does not exceed GBP250, the supplier may issue the customer with a simplified invoice. If the charge made for the individual supply is:
• GBP250 or less (including VAT), an invoice showing the supplier’s name, address and VAT registration number, the time of supply (tax point), a description that identifies the goods or services supplied, and for each VAT rate applicable, the total amount payable, including VAT
A business can either rely on the EU Quick Fixes proof of dispatch requirements or follow national rules on the proof of dispatch requirements if they prefer.
No special documentation applies in NI for evidencing the application of the Quick Fixes. Normal intra-Community documentation rules apply.
For intra-Community supplies, the UK proof of dispatch rules require a range of commercial documentation, such as customer orders, sales invoices, transport documentation and packing lists. The evidence must clearly identify the supplier, the customer, the goods, the mode of transport and route of movement of the goods, and the destination. The evidence must be obtained within three months after the time of supply and be retained for at least six years. The proof of dispatch conditions under the Quick Fixes requires the seller to hold two documents evidencing dispatch, this is enough to prove that the goods have been transported. The evidence must not be contradictory, and the tax authorities may still disapply the zero-rating if they find evidence to the contrary.
The evidence should be issued by two different parties that are independent of each other, as well as independent of the seller and the customer.
If the buyer arranges transport, they will also need to provide the supplier with a written statement giving details of the transport and Member State of arrival. The buyer must provide this written statement to the supplier by the 10th day of the month following the supply.
For further information on the Quick Fixes, see the Quick Fixes subsection above.
Foreign currency invoices. If a VAT invoice is issued in a foreign currency, the domestic currency, which is British pound sterling (GBP), equivalent of the VAT amount must also be stated on the invoice. Suppliers may use any of the following acceptable exchange rates:
• The UK market selling rate at the time of the supply (rates published in UK national newspapers are acceptable as evidence of the rates in force at the relevant time).
• The UK VAT authorities’ published period rates of exchange.
• Any other acceptable rate that is used for commercial purposes (and not covered by the two alternatives above), subject to agreement in writing with the UK VAT authorities.
Supplies to nontaxable persons. In the UK, a taxable person is not required to provide a VAT invoice for B2C (e.g., retail) supplies of goods and services. In practice, this will normally mean issuing a VAT invoice to any customers who ask for one.
Supplies of digital services to EU consumers are subject to VAT in the Member State where the customer belongs. Although the vast majority of EU Member States, and the UK, do not require VAT invoices to be issued for cross-border B2C supplies, UK taxable persons making B2C supplies of digital services to customers in other EU Member States should check invoicing requirements in the customer’s Member State. For further details of the VAT rules on digital services in the EU, see the EU chapter
Distance selling. For intra-Community distance sales made B2C, a full VAT invoice must be issued. However, if the supplier operates the OSS regime, then no full VAT invoice is required unless requested.
Records. In the UK, the records that must be held for VAT purposes include the following:
• Copies of all invoices issued
• All invoices received (originals or electronic copies)
• Self-billing agreements
• Name, address and VAT number of any self-billing suppliers
• Debit or credit notes
• Import and export records
• Documentation in relation to acquisitions in NI of goods from EU Member States and copy documentation issued/received in relation to dispatch of goods from NI
• Records of items VAT cannot be claimed on – for example business entertainment
• Records of goods given away or taken from stock for private use
• Records of all the zero-rated, reduced or VAT exempt items bought or sold
• A VAT account
General business records, such as bank statements, cashbooks, cheque stubs, paying-in slips and till rolls must also be kept.
In the UK, VAT books and records can be kept outside of the country. HMRC practice is not to specify where the records must be kept, but they expect them to be accessible to them when required and follow Making Tax Digital (MTD) rules (see Digital tax administration subsection for further details).
Record retention period. VAT records must be kept for at least 6 years (or 10 years if you used the VAT Mini-One-Stop-Shop (MOSS) service pre-Brexit). All taxable persons (as per the MTD regime, see the subsection Electronic filing below) must keep VAT records digitally, as well as a number of other digital records, including business name, address and VAT registration number, any VAT accounting schemes used, the time of supply, the net value of the supply and VAT on everything bought and sold. All transactions must be added to the digital records, but paper records like invoices or receipts do not need to be scanned. Additional records must be kept if digital services are supplied in the EU and the VAT MOSS scheme was used.
Electronic archiving. Electronic archiving is allowed in the UK. However, it is not mandatory. If records are kept digitally, for example, under MTD, these should be archived electronically. However, records not required to be kept digitally can be archived in paper format.
I. Returns and payment
Periodic returns. VAT returns are generally submitted quarterly. VAT return quarters are staggered into three cycles to ease the UK VAT authorities’ administration. The following are the cycles:
• March, June, September and December
• February, May, August and November
• January, April, July and October
Each taxable person is notified at the time of registration of the return cycle it must use. However, the UK VAT authorities will consider a request to use VAT return periods that correspond with a taxable person’s financial year. In addition, a taxable person whose accounting dates are not based on calendar months may request permission to adopt nonstandard tax periods.
Taxable persons that receive regular repayments of VAT may request permission to submit monthly returns to improve cash flow.
VAT returns must generally be submitted by the last day of the month following the end of the return period. However, in most cases, taxable persons that submit their VAT returns electronically have an additional seven calendar days after the normal due date in which to file their returns and make payment. Businesses that use the annual accounting scheme or are required to make payments on account do not qualify for this seven-day extension.
Periodic payments. Payments of VAT due must be made electronically. Payment must generally be made by the last day of the month following the end of the return period. However, in most cases, taxable persons that submit their VAT returns electronically have an additional seven calendar days after the normal due date in which to file their returns and make payment (businesses that use the annual accounting scheme or are required to make payments on account do not qualify for this seven-day extension and must make several payments throughout the period).
EU Sales Lists (ESLs). VAT-registered businesses in the UK supplying goods from NI to VATregistered customers in an EU Member State (including transfer of own goods) or an intermediary identified as trading/operating under the protocol in triangular transactions between VAT-registered business in EU Member States must complete an EC Sales List to show:
• Details of EU customers
• The GBP value of the supplies made to them
• The customer’s country code
• The VAT number of the new intended acquirer if call-off stocks are reassigned to a new intended acquirer.
The ESL reporting period for intra-Community supplies of goods is per calendar month for supplies more than GBP35,000 (excluding VAT) in the current or four previous quarters. For supplies less than GBP35,000 in the current or four previous quarters, the ESL reporting period is each calendar quarter ending 31 March, 30 June, 30 September, and 31 December but businesses may choose to submit monthly if preferred.
Businesses that submit annual VAT returns can contact HMRC to apply for approval to submit an EC Sales List once a year if total annual taxable turnover does not exceed GBP145,000; the annual value of supplies of goods from NI to EU Member States is not more than GBP11,000; and sales do not include new means of transport. Businesses not submitting annual VAT returns can apply to submit an annual EC sales list if goods supplied from NI are valued at GBP11,000 or less, the supplies do not include new means of transport and the total taxable turnover does not exceed GBP93,500.The following are the deadlines for submitting ESLs to the UK VAT authorities, for all frequencies of submission with respect to both goods and services:
• For paper ESLs: 14 days from the end of the reporting period
• For electronic ESL submissions: 21 days from the end of the reporting period
Businesses only making low-level supplies of goods from NI to VAT-registered customers in an EU country may not need to fill in the full EC Sales List. Businesses can contact HMRC to ask if to send in a simplified annual EC Sales List, if:
• The value of total taxable turnover in a year is not more than the VAT registration threshold, plus GBP25,500.
• Supplies of goods from NI to VAT-registered customers in EU countries are not more than GBP11,000 a year.
• Sales do not include new means of transport.
Movements of call-off stock cannot be reported on a simplified annual EC sales list.
Correcting errors in previous returns. VAT errors can be adjusted on the next VAT return if the net value of the error on the VAT return for the period of discovery is GBP10,000 or less; or the error is up to 1% of the box 6 (net sales) figure (subject to a maximum of GBP50,000).
Taxable persons must separately disclose errors in writing to HMRC (i.e., they cannot be adjusted on the next VAT return) if they are above the reporting threshold (see above); or an error has been made deliberately.
To make a separate error correction in writing, form VAT652 must be completed and sent to the VAT Error Correction Team. Taxable persons must keep details about the inaccuracy, for example, the date it was discovered, how it happened, the amount of VAT involved and the value of the inaccuracy.
Penalties and interest may be due if an error is due to careless or dishonest behavior (see Section J, Penalties below for further details).
Digital tax administration. Making Tax Digital for VAT. HMRC’s Making Tax Digital (MTD) program applies to VAT and other taxes. It came into effect for VAT from 1 April 2019 for businesses registered for VAT in the UK, with a taxable turnover above the VAT registration threshold limit (currently GBP85,000). From 1 April 2022, the regime was extended to businesses with
taxable turnover below the VAT registration threshold, with the exception of Government Information and National Health Trusts (GIANT) users, which have until at least April 2026 at the earliest before MTD becomes mandatory.
Businesses that fall within the MTD rules must keep their records digitally (for VAT purposes only), evidence a digital journey from source systems through to submission of the VAT return and submit the VAT return to HMRC using MTD-compatible software.
J. Penalties
Penalties for late registration. A penalty is assessed for late VAT registration. This penalty is calculated as a percentage of the VAT due (output tax less input tax) for the “relevant period.” The “relevant period” begins on the date on which the business is required to be registered and ends on the date on which the UK VAT authorities became fully aware of this liability. The penalty rate that applies may range from 30% (in most cases) to 100% (with respect to deliberate and concealed acts) of the VAT due. However, measures exist for the reduction of such penalties if the business voluntarily discloses the failure to register to the UK VAT authorities. The degree of mitigation of the penalties depends on the “quality” of the disclosure. No penalty arises where there is a “reasonable excuse” for the late registration.
Penalties for late payment and filings. For VAT accounting periods beginning on or after 1 January 2023, a new VAT penalty regime applies to the late submission of VAT returns and late payments. The regime replaces the default surcharge regime. There are also changes to the way in which VAT interest is calculated.
For each VAT return submitted late, one late submission penalty point is awarded. Once a penalty threshold is reached, a GBP200 penalty will be issued unless a reasonable excuse applies, in which case points and penalties can be appealed. A further GBP200 penalty will be issued for each subsequent late submission. The penalty points threshold will vary according to VAT return submission frequency:
Points can be reset to zero if VAT returns are submitted on or before the due date for the period of compliance (which depends on VAT return frequency) and all outstanding returns due for the previous 24 months have been received by HMRC.
If the business fails to submit VAT returns by the due date after the points threshold has been reached and a penalty has been issued, the business will become liable for a further fixed rate penalty for each additional missed VAT return deadline.
Late payment penalties. For VAT accounting periods beginning on or after 1 January 2023, for late payment penalties, the sooner the payment is made, the lower the penalty rate will be:
• A penalty will not be charged if the VAT owed is paid in full or a payment plan is agreed with HMRC on or between days 1 and 15.
• A first penalty calculated at 2% on the VAT owed at day 15 if the VAT due is paid in full or a payment plan is agreed with HMRC on or between days 16 and 30.
• A first penalty calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30 where the VAT is paid in full, or a payment plan is agreed on or after day 31.
• If the VAT is more than 31 days overdue, a first penalty will be calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30. A further penalty will be calculated at a daily rate of 4% per year for the duration of the outstanding balance.
From April 2025, late payment penalties for VAT will increase from 2% to 3% at 15 days, 2% to 3% at 30 days, and 4% to 10% from day 31.
Interest. For VAT accounting periods beginning on or after 1 January 2023, when an amount of VAT is not paid by the due date, late payment interest will be charged to the taxable person from the date that payment was due up until the date the payment is received by HMRC. Late payment interest will apply to VAT returns, VAT amendments, assessments and payments on account. Late payment interest is calculated at the Bank of England base rate plus 2.5%. From 6 April 2025, late payment interest rates will increase by 1.5 %, such that interest is charged from that date on late payments of VAT at Bank of England rate + 4%.
Repayment interest. Repayment supplement was withdrawn for VAT accounting periods starting on or after 1 January 2023. From that date, HMRC will instead pay repayment interest on any VAT owed to a business. This will be calculated from the day after the due date or the date of submission (whichever is later) until the day HMRC pays the repayment VAT amount in full. Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.
Intrastat and ESL penalties. Penalties may be imposed if a taxable person’s Intrastat declarations (NI only) are persistently late, missing or inaccurate. The penalty regime is a criminal one and could result in proceedings in a magistrate’s court. This could lead to a maximum fine of GBP2,500 being imposed for each offense. There could be the opportunity to “compound” any proceedings that involve the offer of an administrative fine in lieu of any court proceedings. Penalties may be assessed for the late submission of ESLs (NI only) and for material inaccuracies in ESLs. If an ESL is late, HMRC may serve a notice confirming that there is a default but will usually take no further action if the default is remedied within 14 days of the notice. The notice may also state that the person will become liable, without further notice, to penalties if any more defaults are committed before a period of 12 months has elapsed without there being a default. Where such a notice is served, the person will become liable to a penalty of the greater of GBP50 or GBP5 for each day the default continues after the 14-day period (up to a maximum of 100 days). In respect of any other ESL in relation to which there is a default, the last day for submission of which is after the service and before the expiry of the notice, a penalty of the greater of GBP50 or, GBP5, GBP10 or GBP15 for each day the default continues up to a maximum of 100 days. The daily fine is GBP5, GBP10 or GBP15 depending upon whether the ESL in question is the first, second or third or subsequent ESL.
Where a person has submitted an ESL containing a “material inaccuracy” and within six months of discovering that inaccuracy, HMRC has issued a written warning identifying the statement and stating that future inaccuracies might result in the service of a notice under these provisions, subsequent material inaccuracies could lead to a penalty of GBP100.
Penalties for errors. If a business makes an error on a VAT return despite taking “reasonable care,” it should not be liable to a penalty. Otherwise, the penalty rate depends on the behavior giving rise to the error (rather than the size of the error) and may range from 30% (for “careless” errors) to 100% (for “deliberate and concealed” acts) of the VAT due. However, provisions exist for the reduction of such penalties if the business makes an unprompted (voluntary) disclosure to the UK VAT authorities. The degree of mitigation also depends on the “quality” of the disclosure.
The late notification or failure to notify the tax authorities of changes to a taxable person’s VAT registration details may result in a range of potential penalties. The amount would depend on the nature of any regulatory breach and the business’s compliance history. For further details, see the subsection Changes to VAT registration details above.
Penalties for fraud. A penalty for participating in VAT fraud will be applied to businesses and company officers who “knew or should have known” that their transactions were related to VAT fraud. The penalty is a fixed rate penalty of 30%.