How to charge VAT correctly

Once you are registered for VAT, you must charge VAT on most goods and services you sell to customers in the UK. Getting this right is essential - charging the wrong rate or failing to issue proper invoices can lead to penalties and problems with your VAT returns.

This guide explains when to charge VAT, how to choose the correct rate, when VAT becomes due (the tax point), and how to create compliant VAT invoices.

When you must charge VAT

As a VAT-registered business, you must charge VAT on all taxable supplies you make in the UK. A taxable supply is any sale of goods or services that is not exempt from VAT.

You must charge VAT when you:

• Sell goods or services within the UK
• Loan or hire goods
• Sell business assets
• Provide goods or services in exchange for something else (barter)
• Provide goods or services to staff (unless specifically exempt)

Important: You charge VAT based on your business's VAT registration status, not your customer's. If you are VAT-registered, you must charge VAT even when selling to non-VAT-registered customers.

Understanding VAT rates

Not all goods and services are taxed at the same rate. You must apply the correct rate to each item you sell. Using the wrong rate is a common error that can result in underpaying or overpaying VAT.

The four VAT rates

There are four possible VAT treatments for any supply:

Understanding zero-rated vs exempt

This distinction is crucial for your VAT accounting:

• Zero-rated supplies are still taxable supplies - the rate is simply 0%. You can reclaim input VAT on costs related to making zero-rated supplies.
• Exempt supplies are not taxable supplies. You cannot reclaim input VAT on costs directly related to making exempt supplies.

If you make a mix of taxable and exempt supplies (partial exemption), you may need to apportion your input VAT. This can be complex - consider getting professional advice.

When VAT becomes due - tax point rules

The tax point (also called time of supply) determines when VAT becomes due and which VAT return period a sale falls into. Understanding tax points helps you manage cash flow and ensures you account for VAT in the correct period.

Basic vs actual tax points

The basic tax point is the default date when VAT becomes due:

• For goods: The date goods are delivered, removed, or made available to the customer
• For services: The date services are completed

However, an actual tax point overrides the basic tax point in two situations:

• If you issue an invoice before the basic tax point: The invoice date becomes the tax point
• If you receive payment before the basic tax point: The date of payment becomes the tax point

The 14-day invoice rule

If you issue a VAT invoice within 14 days after the basic tax point, the invoice date becomes the tax point. This gives you flexibility in when VAT becomes due.

Example: You deliver goods on 20 March (basic tax point). You issue an invoice on 28 March (within 14 days). The tax point is 28 March, so the VAT goes on your return covering that date.

If you issue the invoice more than 14 days after the basic tax point, the basic tax point applies instead.

Advance payments and deposits

When you receive payment before delivering goods or completing services, the date of payment becomes the tax point. VAT is due on that payment immediately.

• Part payments: Each payment creates its own tax point for the amount received
• Non-refundable deposits: VAT is due when you receive the deposit
• True deposits (refundable security): Not subject to VAT while they remain refundable

Issue a VAT invoice within 30 days of receiving any advance payment.

Creating VAT invoices

You must issue VAT invoices for most sales to other VAT-registered businesses. The invoice provides evidence for them to reclaim input VAT.

There are three types of VAT invoice, depending on the value of the sale:

Simplified invoices are useful for retail transactions and lower-value sales. However, if a customer requests a full VAT invoice (even for a small sale), you must provide one.

Modified invoices

A modified VAT invoice shows VAT-inclusive prices rather than VAT-exclusive prices. It must still contain all 14 items required for a full invoice, but shows unit prices including VAT. This is common in retail where VAT-inclusive pricing is displayed.

Electronic invoicing

Electronic VAT invoices have the same legal status as paper invoices. Most businesses now invoice electronically using accounting software or email.

Requirements for electronic invoices:

• Same content as paper invoices (all mandatory items)
• Customer agreement to receive electronic invoices (can be implied)
• Authenticity of origin must be verifiable
• Integrity of content must be maintained
• Readable for the 6-year retention period

Most businesses satisfy the authenticity and integrity requirements through normal business controls - keeping reliable records that link invoices to supplies. No special technology is required.

Invoice time limits

You must issue a VAT invoice within 30 days of the tax point. Late invoicing can result in penalties, and HMRC may challenge your VAT accounting if invoices are consistently issued late.

For advance payments, issue the invoice within 30 days of receiving the payment.

Common mistakes to avoid

These errors frequently cause problems with VAT returns:

• Wrong VAT rate: Always check the correct rate for each item. Food items are particularly complex - hot takeaway food is standard-rated, but cold food to take away is usually zero-rated
• Charging VAT on exempt supplies: You cannot charge VAT on exempt supplies. If you do, you must still pay it to HMRC even though you should not have charged it
• Missing invoice details: Incomplete invoices can prevent your customers from reclaiming input VAT. Ensure all mandatory items are present
• Wrong tax point: Account for VAT in the correct period based on the tax point rules. Getting this wrong can cause mismatches between your records and HMRC's expectations
• Confusing zero-rated and exempt: This affects whether you can reclaim related input VAT. If in doubt, check HMRC guidance or ask an accountant
• Not issuing invoices to unregistered customers: While not legally required, keeping proper sales records for all transactions helps with VAT return preparation