Charge, reclaim and record VAT
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1. Charging VAT
All VAT-registered businesses should now be signed up for Making Tax Digital for VAT. You no longer need to sign up yourself.
As a VAT-registered business, you must charge VAT on the goods and services you sell unless they are exempt.
You must register for VAT to start charging VAT.
This guide is also available in Welsh (Cymraeg).
How to charge VAT
When you sell goods or services, you must do the following:
- work out the VAT-inclusive price using the correct VAT rate
- show the VAT information on your invoice - invoices must include your VAT number and display the VAT separately
- show the transaction in your VAT account - a summary of your VAT
- record the amount on your VAT return
VAT rates
There are 3 rates of VAT (standard, reduced and zero-rated). VAT rates can change. You must apply any changes to the rates immediately, from the date they change.
Check the current VAT rates.
When to charge standard rate
You usually charge standard rate of VAT (currently 20%) on most goods and services. Use standard rate unless the goods or services you sell are classed as reduced or zero-rated.
When to charge reduced rate
You charge reduced rate (currently 5%) instead of standard rate on certain goods or services, or if the circumstances of the sale meets certain rules. For example, reduced rate applies to:
- child car seats
- domestic fuel or power
- mobility aids if they’re for someone over 60 and installed in their home
Find a list of reduced rate goods or services.
When to charge zero rate
You charge zero rate on goods and services if you export them, depending on where in the UK you are supplying them from and where they’re going to.
Zero rate means you must still account for and charge VAT (for example, you must include it on your invoices) but the rate you use is 0%.
Charge zero rate on goods you export from:
- Great Britain (England, Wales and Scotland) to somewhere outside the UK
- Northern Ireland to somewhere outside the UK and EU
- goods you supply from Northern Ireland to a VAT registered EU business - you can check if the VAT number is valid
How to calculate prices with and without VAT
You need to work out the total price including VAT (the ‘VAT-inclusive price’) when you sell goods or services.
You might also need to work out how much VAT you’ve paid on goods you bought, for example if reclaiming VAT. You do this by working out what the price of the goods would be without VAT (the VAT-exclusive price).
VAT-inclusive prices
To work out a price that includes the standard rate of VAT (currently 20%), multiply the price excluding VAT by 1.2.
Example
You’re selling a chair for £60 and need to add 20% VAT to get the price including VAT.
60 x 1.2 = 72
The price including VAT is £72.
To work out a price that includes the reduced rate of VAT (currently 5%), multiply the price excluding VAT by 1.05.
Example
You’re selling a child’s car seat for £200 and need to add 5% VAT to get the price including VAT.
200 x 1.05 = 210
The price including VAT is £210.
VAT-exclusive prices
To work out a price that excludes the standard rate of VAT (currently 20%) divide the price including VAT by 1.2.
Example
You bought a table and the total price including 20% VAT was £180.
180 ÷ 1.20 = 150
The price excluding VAT is £150. The amount you can claim back is the difference between the two numbers - £30.
To work out a price that excludes the reduced rate of VAT (5%) divide the price including VAT by 1.05.
Example
You bought a stairlift and the total price including 5% VAT was £483.
483 ÷ 1.05 = 460
The price excluding VAT is £460. The amount you can claim back is the difference between the two numbers - £23.
2. When not to charge VAT
You cannot charge VAT on exempt goods or services.
If you buy or sell an exempt item you should still record the transaction in your general business accounts.
VAT exempt goods and services include:
- financial services, investments and insurance
- garages, parking spaces and houseboat moorings
- property, land and buildings
- education and training
- healthcare and medical treatment
- funeral plans, burial or cremation services
- charity events
- antiques
- gambling or lottery tickets
- sports activities
Read the full list of VAT exempt goods.
Goods and services that are ‘out of scope’
Some goods and services are outside the VAT tax system (‘out of scope’) so you cannot charge or reclaim the VAT on them. For example:
- goods or services you buy and use outside of the UK
- statutory fees, like the London congestion charge
- goods you sell as part of a hobby, like stamps from a collection
- donations to a charity, if given without getting anything in return
Charging VAT to charities
VAT-registered businesses can sell certain goods and services to charities at the zero or reduced rate of VAT.
Find out what qualifies for the reduced rate.
If you’re a VAT-registered business, it’s your responsibility to check the charity is eligible, and to apply the correct rate.
Community amateur sports clubs do not qualify for VAT reliefs for charities.
Check the charity is eligible
Ask the charity to provide you with evidence that they’re a charity. This can be either:
- their Charity Commission registration number
- a letter of recognition from HM Revenue and Customs (HMRC) if they’re not registered with the Charity Commission (for example if they’re a charity in Scotland or Northern Ireland)
Get a written declaration
You also need to ask the charity to give you a written declaration or certificate confirming it meets the conditions for the particular VAT relief.
Charities must follow a particular format for the declaration or certificate. The declaration must be separate from the order form or invoice.
You must keep any declarations or certificates for at least 4 years.
3. VAT on discounts and gifts
There are different rules for charging VAT on discounts, gifts and free services.
Charging VAT on discounts
For basic discounts (for example, a 20% off discount), charge VAT on the discounted price.
Multi-buy offers
Multi-buy offers are where the customer gets a discount for buying more items, for example 3 items for £20.
For multi-buy offers where all the items have the same VAT rate (usually standard rate), charge VAT on the combined price.
If the items in the offer have different rates of VAT, you need to use a method called ‘apportionment’.
Read section 8 of the guidance to VAT rules and procedures to find out how ‘apportionment’ works.
Link-save offers
Link-save offers are where the customer gets a discounted (or free) second item with their purchase, for example ‘buy one, get one free’.
Use ‘apportionment’ to work out the VAT, unless the free or discounted item:
- has a resale value of less than £1
- has a sale value of less than £5
- costs you less than 20% of the total of the other items in the offer
- is not sold at a separate price from the main product
If any of the above apply, charge VAT on the combined value of items.
Charging VAT on coupons or vouchers
Do not charge VAT on either of the following:
- a money-off coupon or voucher you give away free with another item at the time of purchase
- ‘face value’ vouchers that can be used for more than one type of good or service (if sold at or below their monetary value)
Charge VAT when a customer uses a ‘face value’ voucher to buy something from you. If you sold the voucher at a discount, charge VAT at the discounted value.
VAT on gifts
You do not owe VAT if either of the following apply:
- you’re giving away your own goods and services
- the total value of gifts given to the same person in a 12-month period is less than £50
VAT on free goods and services
You usually do not owe VAT on goods and services you give away for free.
| Item or service | Condition to meet to be exempt from paying VAT |
|---|---|
| Free samples | Used for marketing purposes and provided in a quantity that lets potential customers test the product |
| Free loans of business assets | The cost of hiring the asset is included in something else you sell to the customer |
| Free services | You do not get any payment or goods or services in return |
4. Reclaim VAT on business expenses
You can reclaim VAT on items you buy for use in your business if you’re VAT registered. Do this in your VAT return.
There are different rules if your organisation is VAT-exempt (for example, an educational academy or an eligible charity). Read guidance on reclaiming VAT as an organisation not registered for VAT (VAT126).
If any items are also for personal use, you can only claim the business proportion of the VAT.
Examples
Half of your mobile phone calls are personal. You can reclaim 50% of the VAT on the purchase price and the service plan.
You work from home and your office takes up 20% of the floor space in your house. You can reclaim 20% of the VAT on your utility bills.
You must keep records to support your claim and show how you arrived at the business proportion for a purchase. You must also have valid VAT invoices.
If you reclaim VAT on goods or services which you’ve not paid for, you must repay HMRC. This is called ‘clawback’. Read the guidance on clawback to find out when and how to repay VAT you previously reclaimed.
If you sell both taxable and exempt goods
If you sell goods or services that are a mixture of taxable and exempt from VAT, your business is considered ‘partly exempt’. Find out about partial exemption and how to calculate what you can reclaim.
Purchases before registration
You can reclaim VAT paid on goods or services bought before you registered for VAT if you bought them within:
- 4 years for goods you still have or goods that were used to make other goods you still have
- 6 months for services
You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.
If you use the VAT Flat Rate Scheme
You cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000.
Vehicles
You might be able to reclaim all the VAT on a new car or commercial vehicle if you use it only for business. You must be able to show that it is not used on a personal basis, for example it’s specified in your employee’s contract.
‘Personal use’ includes travelling between home and work, unless it’s a temporary place of work.
You might also be able to claim all the VAT on a new car if it’s mainly used:
- as a taxi
- for driving instruction
- for self-drive hire
If you buy a used car for business use, the sales invoice must show the VAT.
If you hire a car to replace a company car that’s off the road, you can usually claim 50% of the VAT on the hire charge.
If you hire a car for business use only, you can reclaim all the VAT if you hire it for no more than 10 days.
Fuel costs
There are different ways of reclaiming VAT on fuel, if you do not pay a fixed rate under the Flat Rate Scheme.
You can reclaim all the VAT on fuel if your vehicle is used only for business.
If you use the vehicle for both business and personal purposes, you can either:
- reclaim all the VAT and pay the right fuel scale charge for your vehicle
- only reclaim the VAT on fuel you use for business trips - you’ll have to keep detailed mileage records
You might choose not to reclaim any VAT, for example if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim.
If you choose not to reclaim VAT on fuel for one vehicle you cannot reclaim VAT on any fuel for vehicles used by your business.
Additional vehicle costs
You can usually reclaim the VAT for:
- all business-related running and maintenance costs, like repairs or off-street parking
- any accessories you’ve fitted for business use
You can do this even if you cannot reclaim VAT on the vehicle itself.
Travel expenses
You can reclaim VAT on employee travel expenses for business trips. Travel expenses can include transport, meals and accommodation that you pay for. Find out who counts as an employee.
You can reclaim VAT on other kinds of expenses (not just those related to travel) for self-employed people who are treated as employees.
You cannot reclaim VAT if you pay your employees a flat rate for expenses.
Business assets of £50,000 and more
There are special rules for reclaiming VAT in the Capital Goods Scheme, which means you must spread the initial VAT claimed over a number of years.
What you cannot reclaim
You cannot reclaim VAT for:
- anything that’s only for personal use
- goods and services your business uses to make VAT-exempt supplies
- the cost of entertaining or providing hospitality to people you do business with (for example theatre or sports tickets)
- goods sold to you under one of the VAT second-hand margin schemes
- business assets that are transferred to you as a ‘going concern’
5. Keeping VAT records
HM Revenue and Customs (HMRC) may check your records to make sure you’re paying the right amount of tax.
Records you must keep
You must keep a record of the following:
- everything you buy and sell (including zero-rated, reduced and VAT exempt items)
- copies of all invoices you issue
- all invoices you receive (original or electronic copies)
- self-billing agreements (where the customer prepares the invoice)
- the name, address and VAT number of any self-billing suppliers
- debit or credit notes
- any goods you give away or take from stock for your private use
Keep general business records such as bank statements, cash books, cheque stubs, paying-in slips and till rolls.
Find out what records you must keep when you export goods.
Records you must keep digitally
You must keep some VAT records digitally (also known as an ‘electronic account’) - unless you’re exempt from following ‘Making Tax Digital for VAT’ rules.
Keep digital records of the following:
- the VAT on goods and services you supply (supplies made)
- the VAT on goods and services you receive (supplies received)
- the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
- any adjustments you make to a return
- reverse charge transactions - where you record the VAT on both the sale price and the purchase price of goods and services you buy
- any VAT accounting schemes you use
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
- your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
Keep digital copies of documents that cover multiple transactions made on behalf of your business by:
- volunteers for charity fundraising
- a third party business
- employees for expenses in petty cash
How to keep digital records
Use a compatible software package or other software (like spreadsheets) that connect to HM Revenue and Customs (HMRC) systems.
If you have recently registered for VAT, you should wait for HMRC to confirm your registration before downloading compatible software. Keep paper version of the records while you wait.
Linking your records digitally
If you use more than one software package or product to keep records and submit returns, you need to link them. This must be a digital link. You cannot manually transfer this data, or ‘copy and paste’, between software.
Some ways you can link your software include:
- using formulas to link cells in spreadsheets
- emailing records
- putting records on a portable device to give to your agent
- importing and exporting XML and CSV files
- downloading and uploading files
When you’re exempt from keeping digital records
You must follow the rules for ‘Making Tax Digital for VAT’ by keeping some records digitally, unless:
- your business uses the VAT GIANT service, for example if you’re a government department or an NHS Trust
- you’re eligible for an exemption
How long you must keep records
Begin keeping records when you register for VAT. You must keep VAT records for at least 6 years (or 10 years if you are using the VAT One Stop Shop (OSS) scheme or used the VAT Mini One Stop Shop (MOSS) scheme).
VAT invoices
Only VAT-registered businesses can issue VAT invoices. If you’re VAT-registered, you must:
- issue valid invoices
- keep copies of all the sales invoices you issue even if you cancel them or produce one by mistake
- keep all purchase invoices for items you buy
Find out what to include in a valid VAT invoice.
You cannot reclaim VAT using an invalid invoice, a pro-forma invoice, a statement or a delivery note.
If a supplier issues you an incorrect invoice
If a supplier issues you an invoice where the amount to pay is wrong, you need to ask the supplier to correct it and issue a new invoice.
If you pay less than the amount due on an invoice, you can only reclaim the VAT on the amount paid - not what is on the invoice.
You cannot claim more VAT than is shown on a valid VAT invoice.
VAT account
You must keep a record of the VAT you charge on sales and the VAT you pay on your purchases. This is called a ‘VAT account’.
You use the figures in your VAT account to complete your VAT return.
There are not any rules on what a VAT account should look like, but it must show:
- your total VAT sales
- your total VAT purchases
- the VAT you owe HM Revenue and Customs (HMRC)
- the VAT you can reclaim from HMRC
- if your business uses the VAT Flat Rate Scheme, the flat rate percentage and turnover it applies to
If you are a Northern Ireland business registered for VAT, you must also show the VAT on any EU purchases or sales.
If you’ve made an error on your VAT return, the VAT account must show when you discovered the error and how you corrected it.
Returns and exchanges
When you return goods to a supplier or a customer returns goods to you, settle the balance of payment by issuing either a:
- replacement invoice
- credit or debit note
Record these in your accounts and keep any original notes.
If you exchange the goods for goods of the same value you do not need to issue a new VAT invoice.
Your credit or debit note must include the:
- same information as the VAT invoice
- reason why it was issued
- total amount credited, excluding VAT
- number and date of the original VAT invoice
Bad debts
If a customer does not pay what they owe for goods or services, you can write off the invoice as a ‘bad debt’. You may be able to claim relief from VAT for bad debts. Do this in your VAT Return.
If you write off an invoice as a bad debt, you must keep a separate ‘VAT bad debt account’. The debt must be older than 6 months when you make your claim.
You must claim a refund from HMRC within 4 years and 6 months of the date the payment was due or the date of supply (whichever was later).
For each bad debt you must show:
- total amount of VAT involved
- amount written off and any payments you’ve received
- the VAT you’re claiming on the debt
- the VAT period(s) you paid the VAT and are claiming the relief
- invoice details like the date and the customer’s name
You must keep this information for 4 years after the claim is made, or 10 years if you used the VAT MOSS.
Time of supply or tax point
You need to know a transaction’s time of supply (or ‘tax point’). This is the date the transaction takes place for tax purposes.
The tax point tells you which VAT period the transaction belongs to, and which return to put it on.
The tax point can vary, but it’s usually the following:
| Situation | Tax point |
|---|---|
| No invoice needed | Date of supply |
| VAT invoice issued | Date of invoice |
| VAT invoice issued 15 days or more after the date of supply | Date the supply took place |
| Payment or invoice issued in advance of supply | Date of payment or invoice (whichever is earlier) |
The date of supply is:
- for goods - the date they’re sent, collected or made available (for example, when they’re installed in the customer’s house)
- for services - the date the work is finished
Exceptions to the tax point rule
If you use the VAT Cash Accounting Scheme, the tax point is always the date the payment is received.
Read the guidance on how to work out the tax point in other situations. For example, there are different tax point rules for:
- certain trades - like barristers, building and construction
- where the supply is not a ‘sale’ – for example business items taken for personal use
Sometimes, one sale can give rise to 2 or more tax points - for example, where the customer pays a deposit in advance, and then a final payment.