VAT Guide

What actually is VAT?

VAT or Value Added Tax is a tax added to goods and services in the UK in an attempt to tax consumption. It forms the third largest source of income for the Government after income tax and National Insurance, and is therefore vital for the maintenance of public services and the day-to-day running of the country. VAT is paid on most goods and services and is listed as a “secondary tax” as it is paid by businesses to the government, rather than being paid directly by the person bearing the burden – the customer.

VAT has a standard rate (20%) as well as a reduced rate that applies to certain goods, listed below (5%), a “zero rate” of (you guessed it) 0%, and some goods that are exempt or outside of the system altogether!

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What do the different ratings apply to?

Examples of the goods and services which fall under the different VAT levels include:

Standard rated
Alcoholic drinks
Biscuits (chocolate covered only)
Bottled water (inc. mineral water)
Calendars & diaries
Carbonated (fizzy) drinks
CDs, DVDs & tapes
Cereal bars
Chocolate
Clothes & footwear (not for children under 14)
Confectionery/sweets
Delivery charges (postage & packaging)
Electrical goods
Electricity, gas, heating oil & solid fuel (business)
Food & drinks supplied for consumption on the premises (at restaurants, cafes etc)
Hot take-away food & drinks (inc. burgers, hot dogs, toasted sandwiches)
Ice cream
Fruit juice & other cold drinks (not milk)
Nuts (shelled, roasted/salted)
Postal services (Royal Mail/other licensed operators)
Potato crisps
Prams & pushchairs
Road fuel (petrol/diesel)
Salt (non-culinary)
Stationery
Taxi fares
Tolls for bridges, tunnels & roads (privately operated)
Water (industrial)

Reduced rated
Children’s car seats
Electricity, gas, heating oil & solid fuel (domestic/residential/charity non-business)
Energy saving materials (permanently installed in residential/charity premises)
Maternity pads
Mobility aids for the elderly
Sanitary protection products
Smoking cessation products

Zero rated
Aircraft (sale/charter)
Bicycle & motorcycle helmets
Biscuits (not chocolate covered)
Books, maps & charts (not ebooks)
Bread, rolls, baps & pita bread
Brochures, leaflets & pamphlets
Building services for disabled people
Cakes (including Chocolate teacake, Jaffa Cakes)
Canned & frozen food (not ice cream)
Cereals
Chilled/frozen ready meals, convenience foods
Clothes & footwear (for children under 14 only)
Construction & sale of new domestic buildings
Cooking oil
Donated goods sold at charity shops
Eggs
Equipment for disabled people (inc. blind/partially sighted)
Fish (inc. live fish)
Fruit & vegetables
Live animals for human consumption
Meat & poultry
Milk, butter, cheese
Newspapers, magazines & journals
Nuts & pulses (raw for human consumption)
Prescription medicine
Protective boots & helmets (industrial)
Public transport fares (bus, train & tube)
Salt (culinary)
Sandwiches (cold)
Sewerage (domestic & industrial)
Shipbuilding (15 tonnes or over)
Tea, coffee & cocoa
Transport in a vehicle, boat or aircraft (not fewer than ten passengers)
Water (household)

Exempt
Antiques, works of art or similar
Burial or cremation (human)
Commercial land & buildings (selling/leasing/letting)
Cultural events operated by public bodies (museums, art exhibitions, zoos & performances)
Education, vocational training, research
Financial services (money transactions, loans/credits, savings/deposits, shares/bonds)
Funeral plan insurance
Gambling (betting, gaming, bingo, lottery)
Health services (doctors, dentists, opticians, pharmacists & other health professionals)
Insurance
Medical treatment & care
Membership subscriptions
Postage stamps
Sports activities & physical education
TV licence

Outside the System
Goods & services sold outside the EU
Goods & services supplied by unregistered supplier
Statutory fees & services (MOT testing, congestion charge etc)
Tolls for bridges, tunnels and roads (operated by public authorities)
Voluntary donations to charity

Since VAT is standardised, as a consumer you won’t have to worry about applying it or calculating it yourself – the business or tradesman you’re working with will do that for you. You just need to make your payment and to them and enjoy your shiny new product or fancy new service. Simple.

A New Tax Year: Are You Prepared?

A new tax year commenced on the 6th April and a whole new set of reforms came with it. They can often be rather difficult to understand, particularly if you are one of the lucky few who have to complete a self assessment. The changes range from income tax right through to pensions, so let’s take a brief look at them and how they may affect you:

Income Tax

Tax free personal allowance will increase this year from £10,000 to £10,600. It will also be the first year people born between the 6th April 1938 and 5th April 1948 will have the same allowance as working age people, as their allowance has only increased by £100. The higher rate tax threshold is rising to £42,385 and the starting rate of income tax on savings will be cut from 10% to 0% on savings up to £5,000. Couples allowance means that people who are married or in a civil partnership are able to transfer up to £1,060 of their tax free allowance to their partner but only if neither of them pay more than the basic rate of income tax. Lastly, married couple’s allowance, which is only available if one partner was born before the 6th April 1935 has been increased to a maximum of £8,355 and a minimum of £3,220.

If you have overpaid tax, you will be able to choose between a refund or saving it for future tax bills.

National Insurance

National Insurance has one change this tax year. The Class 2 rate of contributions is increasing from £2.75 to £2.80. Class 3 contributions are increasing from £13.90 to £14.10.

State Pension

The basic state pension is increasing by 2.5 per cent or to £2.85 per week to a maximum of £115.95 per week. The maximum amount that pensioners who are on low incomes can receive with the addition of pension credit is £151.20 for a single person or £230.85 for a couple.

Pension Lump Sums

Under new rules, you can now withdraw your pension in one lump sum, however it will be subject to be taxed at your marginal rate of income tax (e.g. 20%, 40%) rather than 55% as was previously claimed.

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Inherited Pensions

Tax on inherited pensions is scrapped if the pension holder dies before they reach age 75.

Isa Allowances

The tax free annual Isa allowance will increase from £15,000 to £15,240. The junior Isa annual allowance will increase from £4000 to £4,080. The child trust fund allowance will also increase to the same amount.

Tax Credits and Child Benefit

Working Tax Credits are increasing by small amounts.

Basic element: £1,960.

Couple and lone parent element: £2,010.

30 hour element: £810.

Disabled worker element: £2,970.

Severe disability element: £1,275.

The Childcare element will be frozen at £175 for one child/ £300 per week for two or more children. For Child Tax Credits, the family element is frozen at £545 a year, but there are small changes to other elements.

If you have a high income and you claim Child Benefit, you may need to complete a self assessment.

Child element: £2,780.

Disabled child element: £3,140.

Severely disabled child element: £1,275.

Child Benefit is increasing by 20p a week to £20.70 for the first child and to £13.70 for the second and subsequent children. Guardian’s allowance is increasing by 20p a week to £16.55.

Maternity and Paternity Pay

The statutory rate of maternity and paternity pay is increasing from £138.18 to £139.58 per week.

Air Passenger Duty

Children who are under the age of 12 won’t have to pay Air Passenger Duty on economy class tickets from 1st May.

 

 

This is only a basic guide to the changes. If you are unsure of anything, make sure to dial the HMRC Helpline who will be able to assist you further.

 

 

 

 

 

 

Booksellers Voice VAT Concerns Regarding Scottish Referendum

Booksellers north of the border are raising their concerns over VAT in the event that the Scottish referendum should lead to a ‘yes’ vote, which would result in the country’s independence.

Suppliers like The Mainstreet Trading Company, Far From the VAT-books-scottish-referendumMadding Crowd, The Edinburgh Bookshop and Elgin & Banchory are just some of Scotland’s best-loved bookshops hoping to increase awareness of what an independent Scotland could mean for booksellers and book-buyers.

Should the Scottish referendum result in a ‘yes’ vote, the country would be forced to reapply for membership within the European Union, where the VAT on printed books would be surplus to a 15% minimum.

If Scotland was made independent from the rest of the UK, it would no longer be partial to a 0% VAT rate on printed books (as is the current case for Ireland and the UK), but would instead need to adhere to the EU rate of VAT for all products of the written word.

This means that customers could be paying up to 15% more for their books than they do now, which sellers and traders claim could harm the industry.

In an open letter to The Bookseller, bookshops and publishers collectively warn:

[quote]Bookshops would be faced with either applying the VAT required, i.e. many hours spent pricing books, only to reinforce the view that Amazon is the cheaper option and, in all likelihood, tip those loyal customers over to the dark side. Or, absorb the VAT and in many cases, render themselves unprofitable at a stroke, with the double hit of losing 5% per sale and paying publishers 5% VAT on purchase.”[/quote]

At the moment, online sellers like Amazon are enjoying a 3% VAT rate on printed books by running their services offshore from Luxembourg. From January 2015, however, new VAT rules will bring this perk to an end for the company.

Meanwhile, countries within the EU enjoy VAT at varying rates so long as it is no less than 5% (not including Luxembourg). However, thanks to the European Comissioner for Enlargement Stefan Fule, new EU members must apply a 15% minimum until allowed otherwise.

If Scotland should join the EU through the normal accession route, the Commissioner has said that it will have to apply for the normal 15% VAT rates, with a VAT rate of “no less than 5%” set on a limited list of certain supplies. Either way, this will result in a minimum 5% levy on printed books.

[quote]”Reading and education have always been a matter of pride in Scotland and it would be tragic if the nation’s love of literacy were undermined by such a charge,”[/quote] the letter concluded.

Businesses Face Unpaid VAT Bills Thanks To Recession

Many businesses are facing unpaid VAT bills this year thanks to the recession leaving many customer payments outstanding, it was unpaid-VAT-billrecently reported.

Thanks to the 2008 recession, many businesses have been left hanging as customers fail to pay debts owed from service charges and goods. As a result, many are now facing huge bills from the UK tax office as they struggle to regain their footing in the VAT field.

HM Revenue & Customs (HMRC) has reported that the amount of VAT overdue in 2013 increased by £100 million to £2.6 billion from the year before. The figures came from the firm LDF, which provides finance for business.

Small to medium businesses are only required to pay VAT after their customers have paid for services, but businesses with an income of over £1.35 million are made to pay their VAT as soon as a customer has been invoiced.

This means that businesses whose customers do not pay straight away may struggle to pay VAT on a quarterly basis, as is expected, making them vulnerable to the debts and overdue charges that missed payments can bring.

Peter Alderson, managing director for LDF, explained:

[quote]The recession saw many fall behind with their VAT payments and the recent economic upturn has done little to ease the burden.

“Some are still dealing with a backlog of unpaid VAT and other tax bills while scrambling to source funding for upcoming tax bills.”[/quote]

VAT is a type of ‘reflexive’ or indirect tax, paid automatically when we pay for consumer services or items. It is in addition to income tax and national insurance and is one of the Government’s largest sources of income.

For businesses, VAT is calculated based on the amounts of a company invoices it issues to customers, rather than the amounts it has actually received from customers.

When the recession first hit in 2008, HMRC allowed eligible businesses to put payments on hold until their financial situation improved. This was named the ‘Time to Pay’ scheme, which the tax office later started to wind down in 2011.

The closure of the Time to Pay scheme meant that many businesses continued to suffer from cash flow problems due to unpaid customer accounts, which led to financial uncertainty and missed VAT payments.

[quote]Previously businesses could rely on borrowing from the bank to fill the gap, but since the recession this has become increasingly difficult to find,”[/quote]

Peter Alderson said.

[quote]This has left many businesses, especially smaller ones, in real difficulty. Late paying customers cause huge cash flow problems even for successful and fast growing business.”[/quote]

Printed Books Should Have Same VAT Rate As Digital, Says International Monetary Fund

The International Monetary Fund (IMF) has suggested that the same amount of VAT should be applied to printed books and media as to books-VATdigital, to create a fairer market for publishers.

Printed books are currently one of the few items that are entitled to zero-rate VAT. These also include some food items and children’s clothing.

However, the IMF has argued that it is unfair for physical books and literature to be zero-rate when e-books, digital movies and music files are subject to the standard 20%.  In the Fund’s latest assessment of the economy, in which it looked at possible solutions for reducing debt and boosting the UK’s  financial growth, it has called for VAT to be made equal across all literature platforms.

The latest report said:

[quote]”Revenue measures could include reducing tax expenditures (such as VAT zero-ratings).”[/quote]

The IMF did not specify which items should be eligible for the proposed increase; however, a recent report commissioned by the European Commission suggested that physical books should be the first things to lose the zero-rate.

Reducing zero-rate VAT on printed  literature would create a balanced, single rate of VAT across all digital and physical platforms, it said.

But others, like the European Commission vice-president Neelie Kroes, doesn’t agree. She stated that she would prefer it if taxes were “equalised downwards”.

So far, Germany has lowered the rate of VAT on its audiobooks to just 7%, and is planning to make a similar reduction for its e-books. Meanwhile, France and Luxembourg have reduced their rates on digital media to 5.5% and 3% respectively.

When Europe declared a 20% VAT rate for e-books, the rule was criticised by consumers, publishers and organisations alike. The International Publishers Association (IPA) called it “discrimination” against digital media and said the situation was “technophobic, backward and unfair”.

IPA secretary general Jens Bammel called the European approach “a mess.” She said:

[quote]”It stands in the way of digital migration. With major markets like Brazil and Mexico making e-books exempt from VAT, Europe is in danger of getting left behind.

“We need consistent treatment for all book formats, and the most logical way to achieve this is by reducing VAT on e-books.”[/quote]

From January 1 2015, new VAT legislation in the EU will come into play which will tax services like broadcasting, telecoms and electronically supplied services (including e-books) at their place of consumption.

UK booksellers and literary organisations are pushing for the e-book VAT to be scrapped, which would indeed create the level VAT playing field that the IMF so desperately wants to see.