What VAT Rate Should I Apply to My Products?
One of the most stressful things about running your own retail business can be good book-keeping. With expenses, margins, profits and vitally, taxes it's no wonder maths is one of the most hated subjects at school for so many!
To make things a little easier for you, we look at VAT for retail businesses and answer the question of, how much VAT you should be applying to your products.
What is VAT?
VAT (or Value Added Tax) is a tax paid on consumer spending. Basically, it is a tax placed on a product whenever value is added at a stage of production and at final sale. Take a radio for example; the manufacturer is charged VAT on parts to build the radio, and the consumer is charged an applicable VAT on purchase. Of course, whether your business is VAT registered or not will be critical in deciding if you must apply VAT. Learn more about VAT registration thresholds here.
There are three standard rates of VAT within the UK, as well as a couple of other ‘statuses’. Which ones apply to you will depend on the type of product you are selling.
1.Standard Rate – 20%
This is the standard rate of VAT within the UK. Unless your business provides a specific product type suitable to one of the tax rates below, then this is the rate that you should be applying to your products.
2.Reduced Rate – 5%
Reduced rate VAT can be applied to some goods and services, such as children’s car seats, maternity products, sanitary pads, mobility aids for the elderly and smoking cessation products such as nicotine patches and gum. This rate also applies to many energy-saving materials used in homes as well as home heaters and radiators.
You might notice a pattern here, in that reduced rate products tend to revolve around health, safety and heating/energy saving options. They are all ‘positive’ products and services, so be sure to check your rates if you are providing these or similarly beneficial products.
3.Zero Rate – 0%
In terms of retail, the zero rate products are generally items that you would consider ‘essentials’ - items that people need for personal or family health, safety products such as cycle helmets and protective wear for worksites and books (but no e-books, however).
This also includes some essential food products as well as anything relating to printing, postage and publications such as books, magazines and newspapers. It might also be interesting (although not entirely useful to note) that the zero rate also covers the purchase of helicopters.
It is unlikely that in retail you will find yourself providing any tax-exempt products, but it is worth knowing that this section on VAT exists, for future reference. You never know when it might come in handy.
Generally, tax exemption status covers services such as certain land and property licenses, health services provided by professions, insurance and financial goods and services.
Specific Rate Products
Much like reduced VAT rate products, there are products which have their own specific VAT rates or additional ‘duties’ to pay, so make sure to check if anything you are selling falls under a unique rate. The most well-known examples of unique rates apply to alcohol and tobacco. However, there are also unique rates to be applied to petrol, diesel and other fuels, gambling, insurance, flights and some goods from abroad.
If you sell your products outside of the EU or to another country within the EU, then it may be that VAT does not apply. However, there may also be different taxes and stipulations you must consider. See how VAT applies overseas for further details.
For more information, visit the UK Government page on VAT rates of different goods and services for a comprehensive list of rates.