Value Added Tax, or VAT, is one of the most complex tax entrepreneurs have to deal with. In this guide, I cover how it works in the UK in 2024, including when to register, when to charge, how to file returns. Do note that this guide covers the regular UK VAT rules, not the Northern Ireland Protocol rules.
When VAT applies
VAT only applies to specific transactions, which are referred to as “VAT-liable”. In most cases, both the client and the place of supply must be in the UK for a transaction to be VAT-liable. The place of supply refers to the location where work is performed when it comes to the supply of services (B2C), the location of the client when it comes to the supply of services (B2B) and usually the location where customer is located when it comes to the supply of goods.
Example one, Lee performs a service from Singapore for a UK-based individual client. In this example, no UK VAT applies as only one condition is met (the client is UK-based but the place of supply is Singapore).
Example two, Amelia performs coaching services from the UK for US-based clients. In this example, no UK VAT applies as only one condition is met (the place of supply is the UK but the clients are US-based).
Example three, Robert provides on-site IT support to UK-based clients. In this example, UK VAT applies as both conditions are met (the clients are UK-based and the place of supply is also the UK).
Example four, Niko sells physical sports goods to UK-based clients. The orders ship from a warehouse located in Japan. In this example, UK VAT applies as both conditions are met (the clients are UK-based and the place of supply is the UK).
Example five, Felix performs services from the UAE for UK-based business clients. In this example, UK VAT applies as both conditions are met (the clients are UK-based and the place of supply is also the UK).
If you have VAT-liable sales, you will have to keep track of them and register as soon as you hit the 85000 GBP annual threshold (UK registered businesses). Until you hit the threshold, you should not charge VAT to your clients. It is also important to understand that only VAT-liable sales count towards the threshold. Non-UK registered businesses must register immediately, however, if they have VAT-liable sales.
There are special rules for automated electronic services, such as ebooks, music streaming, web hosting, online courses (if automated) etc. When selling such services to UK-based customers, the place of supply will always be deemed to be the UK. Such transactions will thus always be deemed VAT-liable.
Example five, Jimmy sells ebooks to UK-based clients via his website. Jimmy is based in Australia. In this example, UK VAT applies as both conditions are met (the clients are UK-based and the place of supply is also the UK, due to the sales falling under the special rules for automated electronic services). Jimmy will have to register for UK VAT immediately after his first sale.
Do note that sales to UK-based business customers (B2B) can usually use the reverse charge mechanism. This shifts the VAT compliance burden to the client, and exempts the supplier from having to register for UK VAT. You can see an example here of a reverse charge invoice.
UK VAT with a UK LLP
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All businesses with VAT-liable sales must comply with VAT record keeping rules. In short, this means collecting customer’s full name, address, VAT ID if applicable and whenever possible, transaction meta data (customers IP addresses, credit card issuing country etc).
Registration is done online, here. It usually takes 1-2 weeks for HMRC to process applications. In most cases, three identification documents have to be supplied (acceptable documents include passports, national ID cards, drivers licenses etc).
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Once registered, you will be required to file quarterly VAT returns. This can be done online using the same user ID and password you created when applying for the VAT account. Do note that VAT reclaim is done as part of the return, and is usually paid by HMRC within a week of filing.
The UK has left the European Union and as such, does not participate in the EU VAT system anymore. Sales where the place of supply is in the UK will be treated by EU countries in the same way as sales where the place of supply is in the US, Japan, China etc (for sales on or after the 1st of January 2021).