A business registered for VAT in the United Kingdom must know when to charge and when not to charge Value Added Tax (VAT) to your customers. Generally, you cannot charge VAT on exempt and out of scope products and services.
Out of scope of VAT
Generally, a transaction that is classified as out of scope is excluded from VAT return. This basically mean the transaction is outside the scope of VAT in the United Kingdom. For this transaction, you cannot charge 20% VAT on sales or reclaim any VAT paid to your suppliers.
Examples of transactions classified out of scope of VAT UK are as follows:
- Where you provide transportation services to a UK and European Unions (EU) customers but the place of the services to be rendered is outside Europe, say in Russia or Malaysia or China or USA.
- Government statutory fee like London Congestion Charge.
- Donations to charity.
Zero rated VAT transactions
Selling to customers based in the EU countries are zero rated sales if your customers can provide you with their EU country VAT registration number. In this situation, you put 0% VAT on your sale invoice. This transaction must be included in your VAT return and you must also complete your EC sales List.
You must include your customers’ VAT number on the EC Sales List. Remember to check the EC VAT number for their validity.
Products classified as zero rated in the United Kingdom includes books, newspapers, children’s clothes and shoes and motorcycle helmets. Please do not include these sales in the EC Sales list.
Standard rated VAT
If you are selling to UK customers then you would require to charge VAT on your sales.
An exception is when the services are to be rendered is outside Europe, say a taxi service at Hong Kong airport transfers. This falls under the out of scope category.
Some goods and services are exempt from VAT. In other words, no VAT is charged on sales. Examples are insurance, stamps, postage and health care services provided by hospitals.
VAT notice 741/A explains how to determine the place of supply of your services and how to deal with supplies of services which you receive from outside the United Kingdom.