VAT Glossary
Find definitions of the main terms related to VAT in the UK.
VAT Base
The total value on which VAT is charged. For example, if goods are sold for £100, the VAT base is £100 before applying the VAT rate.
Reverse Charge
A system where the customer, not the supplier, accounts for the VAT. Common in cross-border services and certain UK domestic construction services.
VAT Credit
Occurs when input VAT (on purchases) is higher than output VAT (on sales). Businesses can request a refund from HMRC or carry it forward.
VAT Exemption Threshold
The turnover level under which a business does not need to register for VAT. In the UK, the threshold is £85,000 (2024).
VAT Pro-Rata
Used by businesses making both taxable and exempt supplies to calculate how much input VAT can be reclaimed.
Input VAT
VAT paid on purchases and expenses that can often be reclaimed from HMRC if related to taxable business activities.
Output VAT
VAT charged on sales to customers. This must be reported and paid to HMRC, minus any deductible input VAT.
Tax Point (Time of Supply)
The date when a sale is treated as taking place for VAT purposes. Usually the invoice date or payment date.
Standard Rate
The main VAT rate in the UK, currently 20%, applied to most goods and services.
Reduced Rate
A lower VAT rate (5%) applied to certain goods and services, such as children’s car seats or home energy.
Zero Rate
Items taxed at 0%. Businesses still reclaim input VAT. Examples: most food, books, and children’s clothing.
Exempt Supplies
Goods and services not subject to VAT, and input VAT cannot usually be reclaimed. Examples: financial services and education.
Outside the Scope of VAT
Transactions not covered by VAT rules, such as wages or genuine donations.
Flat Rate Scheme
A simplified scheme where small businesses pay a fixed percentage of their turnover as VAT, instead of tracking input and output VAT separately.
Cash Accounting Scheme
Allows businesses to account for VAT only when they receive payment from customers and reclaim it when they pay suppliers.
Annual Accounting Scheme
Businesses make advance VAT payments based on estimates and submit one VAT Return per year instead of quarterly.
Making Tax Digital (MTD)
A UK government initiative requiring businesses to keep digital VAT records and file VAT Returns using approved software.
VAT Return
A report usually submitted quarterly to HMRC showing VAT collected on sales and VAT paid on purchases.
HMRC
Her Majesty’s Revenue and Customs, the UK authority responsible for collecting VAT and enforcing tax compliance.
VAT Invoice
A document issued by VAT-registered businesses containing details required by law, such as VAT number, rate, and amount charged.
EC Sales List
Before Brexit, UK businesses selling goods or services to EU customers had to file this report. No longer required post-Brexit.
Import VAT
VAT due when goods are brought into the UK from abroad. Businesses may reclaim it if the imports are for taxable activities.
Export Sales
Goods sold outside the UK are usually zero-rated, but proper evidence of export must be kept.
Distance Selling Rules
Rules that applied pre-Brexit for sales to EU consumers. Now replaced by UK import schemes and the EU’s OSS.
Domestic Reverse Charge for Construction
A special rule where VAT in the construction industry is reported by the customer rather than the supplier, to combat fraud.
Partial Exemption
When a business makes both taxable and exempt supplies, it can only reclaim part of the input VAT.
Bad Debt Relief
Allows a business to reclaim VAT previously paid to HMRC on sales invoices that customers never paid.
Voluntary Registration
A business below the £85,000 threshold may choose to register for VAT voluntarily to reclaim input VAT.
VAT Deregistration
When a business cancels its VAT registration, either voluntarily (below threshold) or because it stops trading.
VAT Penalties
Fines or surcharges imposed by HMRC for late registration, late payment, or incorrect VAT Returns.
For more information on VAT, visit the official UK VAT website or contact a tax advisor.