VAT obligations on products and services

Whether you need to charge VAT depends on several factors. Let me walk through the key considerations.

VAT registration threshold:

You are required to register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period (this threshold was updated from £85,000 to £90,000 from 1 April 2024). You must also register if you expect your turnover to exceed £90,000 in the next 30 days alone. Once registered, you must charge VAT on your taxable supplies.

You can also voluntarily register for VAT even if your turnover is below the threshold, which can be useful if your customers are VAT-registered businesses or if you incur significant VAT on your own costs that you want to reclaim.

Not all supplies attract VAT at the standard rate:

1. Standard-rated supplies are charged at 20 per cent. This covers most goods and services.
2. Reduced-rate supplies are charged at 5 per cent. Examples include domestic fuel and power, children's car seats, and certain energy-saving installations.
3. Zero-rated supplies are technically taxable but at 0 per cent. Examples include most food (not catering or hot takeaway food), children's clothing, books and newspapers, and exports of goods.
4. Exempt supplies are not subject to VAT at all. Examples include insurance, finance, education provided by eligible bodies, health services by registered practitioners, and certain land transactions. If you make exempt supplies, you do not charge VAT on them but you also cannot reclaim the VAT on costs attributable to those exempt supplies.
5. Outside the scope of VAT means the supply falls outside the VAT system entirely, for example statutory fees, non-business activities, or certain transfers of a going concern.

Why the distinction matters:

If all or most of your supplies are exempt, you may not need to register at all, even if your turnover exceeds £90,000, because the registration threshold applies to taxable turnover (which includes standard, reduced, and zero-rated supplies but not exempt supplies). However, if you make a mixture of taxable and exempt supplies, you become partly exempt and the rules on how much input VAT you can reclaim become more complex.

Practical points to consider:

The classification of your particular goods or services is not always obvious. HMRC publishes detailed guidance in VAT notices, and certain products sit on the boundary between categories. The classification of food items, for instance, has generated a huge amount of litigation over the years.

If you are approaching or have exceeded the threshold, you should register promptly because late registration can result in penalties and you may owe VAT from the date you should have registered, not the date you actually did.

If you sell digitally supplied services to consumers in other countries, or import or export goods, there are additional VAT rules that apply.

To give you a more specific answer, I would need to know what products or services you supply, what your turnover is, and whether you are already VAT-registered. If you can share those details, I can narrow this down considerably.