What VAT covers

What goods and services are within the VAT system?

It would be wrong to assume that VAT is payable at 20% of all goods and services bought and sold. The definition of what comes under VAT is less precise than you would expect. The reason for that being that the VAT system is based on a single legal sentence. Hence, interpretation becomes an issue. The following section is therefore a simplification, and frustratingly, advice may well be required

There are specific goods and services that are either exempt (ie sit outside the VAT system) or zero rated. These are covered later (exempt supplies, zero rated supplies).

  • VAT is payable on imported goods as though it were a customs duty
  • Samples and promotional gifts are taxable at the cost or purchase. If that cost is less than £50, they become tax free (ie not treated as a taxable good)
  • For goods sold at a discount. Where the discount is set (eg 10% off), VAT is charged at the lower, discounted price. Even when the discount is conditional (eg if you purchase within 14 days then you receive 10% off) then again VAT is charged at the lower discounted price, regardless of whether the customer purchases within 14 days and hence receives the discount. In both cases, the lower value must be shown on the invoice to qualify as the price of the taxable supply.
  • Strictly, VAT is payable on goods supplied from one part of a company to another, this is known as self supply. In many cases, but not all, the VAT will cancel out.
  • Where a good is purchased via a credit agreement (or hire purchase), the good is taxable at its price (excluding interest and associated credit agreement costs). The timing of the tax point is complex, the rule of thumb being the time the good is made available or payment made (eg deposit paid). Please seek advice on such matters.