How VAT works

A VAT registered business is able to reclaim the VAT that has been charged by other businesses as ‘input tax’. There are sometimes restrictions on the amount of VAT that can be reclaimed. The VAT charged by a business on its sales is called ‘output tax’.

Most businesses submit a VAT return each quarter, though some submit monthly and others annually. If the Output Tax (on sales) is greater than the Input Tax (on purchases), the difference must be paid to HM Revenue and Customs. If Input Tax exceeds Output Tax then HMRC will make a refund of VAT to the business.

For more information see the Managing VAT section of the HMRC website http://www.hmrc.gov.uk/vat/managing/index.htm

VAT registered business must charge VAT on the goods and services they sell. They can also reclaim the VAT they pay on goods and services used in the business. There are restrictions on the amount of VAT which can be reclaimed on some expenses and by some businesses. For guidance on reclaiming VAT on expenses see http://www.hmrc.gov.uk/vat/managing/reclaiming/index.htm

Goods and services have different rates of VAT. For example, the rate of VAT on most food is 0%, but the VAT rate for confectionery is the standard rate of 20%. This is a complex area. You can find more information at http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm#1

Special rules apply to some business sectors, such as agriculture, health, education, transport and some retailing. See http://www.hmrc.gov.uk/vat/forms-rates/rates/trade-sectors.htm