Value Added Tax, or VAT, is a tax charged on most business-to-business and business-to-consumer transactions in the UK. VAT is also charged on goods, and some services, imported from places outside the European Union (EU) and on goods and some services coming into the UK from other EU countries.

VAT is charged to a buyer by a VAT registered seller. This VAT is reclaimed by a VAT registered buyer after goods and services are purchased.

There are three different rates of VAT - standard, reduced and zero - which apply to different types of goods and services. Some goods and services are exempt from VAT, while others are outside the scope of VAT. Businesses registered for VAT usually account for VAT on a quarterly basis by filling in a VAT return and submitting it to HM Revenue & Customs (HMRC).

VAT is a tax on the sale of goods and services. It is not a tax on profits.

VAT is handled by HM Revenue and Customs.

Businesses must register for VAT if their turnover is more than £64,000 a year (this amount is valid for the 2007-2008 tax year). This means that whenever you buy or sell anything as part of your business, you will have to pay VAT to HM Revenue and Customs.

Businesses collect VAT on the Government’s behalf. All businesses pay VAT on most purchases. This is called input tax. Registered businesses charge VAT on the goods and services they sell. This is output tax.

If a business registered for VAT receives more output tax from sales than it pays on input tax on purchases, it must pay the difference to HM Revenue and Customs at fixed intervals. If you have paid more input tax than you have charged output tax, HM Revenue and Customs will refund the difference to your business.

Businesses with a turnover below the £64,000 limit can register voluntarily.

Sometimes there can be business advantage in doing this. For example, if your business pays a higher-than average amount of input tax and charges a lower-than-average output tax, it could be worth registering to reclaim the input tax you have paid.

Jargon

• Accounting period: see tax period.
• Acquisitions: goods brought into the UK from other EU countries Formerly imports.
• Corporate body: an incorporated body such as a limited company, limited liability partnership, friendly, industrial or provident society.
• Distance sales: where a business in another EU country sells goods to UK consumers, eg Internet or mail-order sales.
• Input tax: the VAT you pay on your purchases which you reclaim from HMRC.
• Output tax: the VAT you charge on your sales which you pay to HMRC.
• Place of supply: the country where a supply of goods or services is said to be made for VAT purposes.
• Self-billing: your customer issues your VAT invoice and sends a copy to you with their payment.
• Supply: selling or otherwise providing goods or services, including barter and some free provision.
• Supply of goods: when exclusive ownership of goods passes from one person to another.
• Taxable person: any business entity that buys or sells goods or services and is required to be registered for VAT. This can be an individual, partnership, company, club, association or charity.
• Taxable supplies: all goods and services you sell or otherwise supplied which are liable to VAT at the standard, reduced or zero rate. - whether or not you are registered for VAT.
• Taxable turnover: the total value - excluding VAT - of the taxable supplies you make in the UK. Excludes capital items like buildings, equipment, vehicles or exempt supplies.
• Tax period: The period of time covered by your VAT return, usually quarterly.
  
• Tax point: the time when a VAT liability arises. For goods, this is usually when you send the goods to a customer or when they take them away. For services, this is usually when the service is performed.
  
• Time of supply. See tax point.