Value added tax

BLP.16 — Value Added Tax (VAT)

VAT is a tax on the supply of goods and services in the UK by a taxable person in the course of business. Governed by the Value Added Tax Act 1994 (VATA 1994) and administered by HMRC. It is borne by the final consumer but collected at each stage of the supply chain.

The core mechanism

• Output tax = VAT a business charges on its sales.
• Input tax = VAT a business pays on its purchases.
• The business pays HMRC the difference (output − input). If input exceeds output, it reclaims the difference. This is why VAT is broadly neutral for businesses but a real cost to end consumers.

The four conditions for a charge to VAT

There must be: (1) a supply of goods or services; (2) made in the UK; (3) by a taxable person; (4) in the course or furtherance of business. All four must be met.

Rates and categories — get these distinct

• Standard rate: 20% (default for most supplies).
• Reduced rate: 5% (e.g. domestic fuel, children's car seats).
• Zero-rated: 0% (e.g. most food, books, children's clothing) — these ARE taxable supplies, so input tax IS recoverable.
• Exempt (e.g. insurance, finance, some land/property, education, health) — NOT taxable supplies, so input tax is generally NOT recoverable.

Key trap: zero-rated ≠ exempt. Zero-rated supplies count toward the registration threshold and allow input-tax recovery; exempt supplies do neither. Confusing the two is the classic SQE error.

Registration

• Compulsory once taxable supplies in the previous 12 months exceed the £90,000 threshold (or are expected to in the next 30 days).
• Voluntary registration is possible below the threshold — useful to reclaim input tax, especially for businesses making zero-rated supplies.

Accounting and administration

• Registered businesses file VAT returns (usually quarterly) under Making Tax Digital, paying output tax less input tax.
• A valid VAT invoice is required to reclaim input tax.

Common traps for SQE1

• Don't confuse the VAT registration threshold (£90,000) with income-tax or corporation-tax thresholds.
• Exempt suppliers (e.g. financial services) cannot recover input VAT — it becomes an absorbed cost.
• VAT is not a tax on profit; it is a transaction tax on supplies, charged regardless of profitability.
• A taxable person can be an individual, partnership or company — registration attaches to the person/entity, not each business activity.