VAT Sales vs. Non-VAT Sales: How to Account for Them Separately

Posted by: Jay Redman
Category: VAT Compliance
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As a business selling goods across the United Kingdom (UK), you are sometimes required to pay VAT or exclude items from VAT sales altogether. In some instances, you are required by HMRC to charge a reduced rate on items that are sold to consumers on E-commerce platforms or at physical locations. 

In this article, we look at VAT sales and non-VAT sales and how you may account for them separately in your business. Some businesses may be providing services to charitable organizations, while others may be selling niche children’s clothes that require them to either charge no VAT or a reduced rate. In other to effectively comply with HMRC, you are required to correctly disclose the amount of VAT you charge on goods or services sold by your company. This article will take you through what you need to know in order to account for VAT and non-VAT sales separately.

Introduction

It is important to always include VAT on your invoice as a business. This will ensure you disclose the right amount of VAT charged on items you sell and equally ensure you get the correct VAT returns on goods and services that you buy from individuals or companies.

What is Value-Added Tax (VAT)?

What is Value-Added Tax (VAT)?

A value-added tax is a consumption tax that is imposed on a good or service whenever value is added at each stage of the production process until the final product is sold. VAT is collected by the seller or business when the good is sold and then paid to Her Majesty’s Revenue and Customs (HMRC). However, some products such as children’s clothes are exempt from the 20% VAT tax rate, while some institutions such as charities pay reduced rates for electricity consumption and other items. As a result of this, businesses can make two types of sales, namely VAT sales and non-VAT sales.

What are VAT sales? 

VAT is a business tax that is charged on goods and services and imposed by HMRC. All businesses that currently have an annual VAT turnover of over £85,000 are required to pay VAT to HMRC. It is an indirect tax that businesses are required to collect on behalf of the government or they risk paying huge fines. While businesses charge VAT at 20%, they equally pay VAT on goods and services that are consumed by their business.

For example, as an E-commerce business selling on Amazon, you may pay VAT on the packaging or branded logos, while the goods you sell on the platform equally have a VAT tax worth 20% of the product consumed. 

To fully comply with HMRC requirements, the seller is required to separately state VAT and should include a registration number in all invoices. However, in most jurisdictions, VAT is included in the final price.

What are non-VAT sales? 

According to HMRC, some goods are considered zero-rated, which means that you may still tax VAT to consumers, but the HMRC requires this rate to be zero. As a business in the UK, you are still required to record zero-rated products in your accounts, and you must equally report them on the company’s VAT return. Examples of zero-rated goods include books and newspapers, children’s clothes and shoes, and motorcycle helmets. Additionally, the majority of goods that are exported from the UK to other foreign countries are exempt from VAT. This is designed to support exports and keep a favorable current account. 

How do you account for VAT sales and non-VAT sales separately?

When a company or business entity is purchasing a good or service from you or your company, you are required to charge VAT. However, in the case where you are selling to a charity or items such as aids for disabled people or advertising and items for the collection of donations, you can include this in your invoice and report it as a zero-rated item. The most credible way of reporting for both VAT sales and non-VAT sales separately is by simply including it in your invoice.

Things to do when charging VAT on your sales

It is important to know the correct VAT rate for you to charge it correctly to your consumers and equally reclaim the VAT you pay on your purchases. Regardless of whether a transaction is charged at the standard rate, the reduced rate, or the zero rate, you must ensure you do the following.

Firstly, ensure you charge the right VAT rate on all the goods and services solely by your company. If you’re a fashion E-commerce business that sells children’s clothes and apparel to consumers across the UK, you must remember to charge the reduced rate in order to fully comply with the HMRC guidelines.

VAT-inclusive Prices

If a single price is shown that includes or excludes VAT, you are required to work out the VAT according to HMRC guidelines. For you to correctly work out the price, including the standard VAT, multiply the price and exclude the VAT by 1.2%. Multiply the price by excluding the VAT by 1.05% to correctly determine the price of items that are sold at reduced rates. 

VAT-exclusive Prices

To work out how to exclude VAT from a sale, divide the price of the good or service by 1.2%. For reduced-VAT items such as children’s clothes, you are required to divide the price, including VAT, by 1.05. This will ensure you charge the right amount of VAT.

Conclusion

As a business in the UK, you are required to charge and disclose the amount of VAT you charge to your customers and what you are charged on the purchase of goods and services. This article illustrates how to account for both VAT sales and non-VAT sales in the U.K.

FAQs:

What about VAT exceptions for gift and link savers?

You are not required to charge VAT on gifts given to the same person if the 12-month value is less than £50. Similarly, you are not required to pay VAT on things such as free samples, provided they meet certain conditions.

How do I charge VAT to charities?

You are not required to charge VAT to charities as a VAT-registered business. However, it is your responsibility to check if a charity is eligible before disclosing any sale as a zero-rated purchase. 

Should I include VAT on my invoice?

It is important to always include VAT on your invoice as a business. This will ensure you disclose the right amount of VAT charged to HMRC as evidence and get the correct VAT return on goods and services that you buy from individuals or companies.

Author: Jay Redman