Understanding What items are subject to VAT helps businesses charge the correct amount and avoid errors. In the UK, VAT applies to most supplies of goods and services made in the course of business, unless a specific exemption or out-of-scope rule applies.
HMRC refers to these as taxable supplies. A taxable supply is any supply that falls within the VAT system and carries a rate of 20%, 5%, or 0%.
Know More About VAT via the Official Government Website and Calculate VAT
Goods and Services Supplied by a Business
VAT is charged on most goods and services supplied by a VAT-registered business.
A service means anything supplied that is not goods. For example:
- Consultancy
- Construction work
- Repairs and maintenance
- Professional services
If the supply is taxable and the business is VAT-registered, the business must add VAT at the correct rate.
Example
A VAT-registered contractor charges £10,000 for services.
At 20%, VAT of £2,000 applies.
The total invoice becomes £12,000.
Hiring or Loaning Goods
VAT applies when a business hires, leases, or loans goods in return for payment.
This includes:
- Equipment hire
- Vehicle leasing
- Tool rental
Even though ownership does not transfer, the hire itself is a taxable supply.
Example
A company hires machinery for £5,000.
At 20%, VAT of £1,000 applies.
The customer pays £6,000.
Selling Business Assets
When a VAT-registered business sells business assets, VAT usually applies if:
- The asset formed part of the business, and
- The original purchase allowed VAT recovery.
Assets may include:
- Machinery
- Equipment
- Commercial vehicles
- Fixtures
However, if the asset was VAT-exempt when acquired or input VAT was not claimed, different rules may apply.
Example
A company sells equipment for £8,000.
If standard-rated, VAT of £1,600 is added.
Commission and Agency Income
VAT applies to commission earned in the course of business. This includes:
- Sales commission
- Referral fees
- Brokerage fees
If the commission relates to a taxable supply, VAT must be charged on the commission amount.
Items Sold to Staff
If a business sells goods or services to employees, VAT normally applies if:
- The supply would be taxable when sold to customers, and
- The employee provides consideration (payment).
For example, staff canteen meals may attract VAT if the meals are taxable supplies.
Business Goods Used for Personal Reasons
If a business removes goods for personal use, VAT may be due. This applies when:
- The business previously reclaimed input VAT on those goods, and
- The goods are no longer used for business purposes.
The business must account for VAT based on the value of the goods.
Example
A retailer takes stock worth £500 for private use.
The retailer must account for output VAT as if the goods were sold.
Non-Sales Transactions
VAT can arise even where no money changes hands. These include:
- Barter transactions
- Part-exchange arrangements
- Gifts
If goods are given as gifts, VAT normally applies if the total cost of gifts to the same person exceeds £50 in a 12-month period. Small business gifts under that limit are usually ignored for VAT.
Therefore, when reviewing What items are subject to VAT, you must consider both sales and non-sales transactions.
What VAT Is Not Charged On
VAT is not charged on:
- Supplies that are legally exempt from VAT
- Transactions that fall outside the scope of UK VAT
Exempt supplies commonly include certain financial services, insurance, and some education services. Out-of-scope transactions sit entirely outside the VAT system.
It is important not to confuse exempt supplies with zero-rated supplies. Zero-rated supplies are still taxable supplies but carry a 0% rate, while exempt supplies do not allow input VAT recovery in most cases.