VAT introduction
VAT is a tax on consumer expenditure levied on most goods and services sold in the UK, imported into the UK or acquired from the EU.
Who should account for VAT
Individuals or organisations must register for VAT once the total value of taxable supplies made by them exceeds the registration threshold, currently £85,000. Once registered they must charge VAT on any taxable sales and can recover the cost of VAT paid on purchases.
Output VAT
VAT is levied by individuals or organisations on taxable supplies made to customers. The business invoices the customers for the value of the goods or services sold plus VAT, which it collects on behalf of HM Revenue and Customs (HMRC). This is known as Output VAT.
Input VAT
VAT is paid by individuals or organisations on the cost of taxable goods or services that they purchase from suppliers. This is known as Input VAT.
VAT Recovery
Individuals or organisations deduct the VAT that they have paid to suppliers from the VAT they have collected from customers and pay this over to HMRC. For those that are able to recover all the input tax that they pay, VAT is not a cost to them as it is all set off against output VAT. For those that cannot recover all the input tax that they pay, either because they make exempt supplies or because they are not registered for VAT, VAT is an additional cost.
The extent to which VAT can be recovered on individual costs is determined by the VAT status of the income with which it is associated. So VAT on a cost directly attributable with a taxable supply can be reclaimed in full regardless of the rate charged. VAT attributable to an exempt supply cannot be recovered at all and so is a cost. Some VAT, such as that incurred by administrative departments, relates both to taxable supplies and exempt supplies - and is therefore attributable to neither. In this case a proportion of the VAT is reclaimable and this reduces the cost of irrecoverable VAT.
Taxable Supplies
Taxable supplies are supplies of goods or services on which VAT is charged. VAT is charged at a standard rate (currently 20%), reduced rate (currently 5%) or zero rate.
Exempt Supplies
Certain supplies are exempt from VAT. This includes educational services and therefore includes a large proportion of the University’s income.
Supplies outside the scope of VAT
Supplies are ‘outside the scope of VAT’ when they are:
- Not made in the course of business
- Made outside the UK (special rules exist for some international services)
- Made by someone who is not a taxable person (e.g. not registered for VAT).
Examples include donation income and grant income, both of which support charitable and non-business activities and apply to the University.
Charitable Status
Charities, such as the University, typically have a large portion of their income made up of exempt supplies or income outside the scope of VAT. As a result the VAT associated with these costs cannot be reclaimed and is a cost. However HMRC do allow charities relief from VAT in a few specific instances. These include advertising, medical and scientific equipment, and medicinal products - all of which can be supplied to the University at a zero rate of VAT.