VAT is a tax on consumer expenditure. It is charged on goods and services which fall within the scope of VAT. When deciding whether something attracts VAT we have to identify:
- If the transaction is within the scope of VAT; and
- If so, which rate of VAT should be applied to it?
A transaction is considered to be within the scope of VAT if it is:
- a supply of goods or services;
- in exchange for some sort of consideration (normally monetary);
- deemed to be made in the UK or the Isle of Man;
- made by a taxable person (a taxable person is an individual, firm, company etc. who is or is required to be registered for VAT); and
- undertaken in the course or furtherance of business.
If the transaction does not meet all of these conditions it is said to be 'outside the scope' of VAT.
E.g. A taxi driver provides taxi services to the University. The driver is not VAT registered because his/her annual income is below the VAT registration limits. The driver is therefore not a 'taxable person' for VAT purposes and the charge to the University is 'outside the scope of VAT' and no VAT is added.
If the transaction is within the scope of VAT, the rate of VAT applicable is ascertained by asking:
Is it specifically
- zero-rated (ZR); or
- reduced-rate (RR)?
These will be discussed in detail later but if none of the above apply then, by default, the transaction will be standard rated and VAT charged at 20%. When processing sales invoices on CUFS you may see other options for VAT rates displayed, such as EZS, EZG, RG and RS. These are additional codes for zero-rating and their use is explained in the sections Sales to Members of the EC, and Sales to the Rest of the World.
VAT is also charged on the majority of services purchased from outside the UK and goods purchased from other EC member states. These charges are a self-charging VAT, covered in sections Purchasing goods from the EC, Purchasing goods from outside the EC and Purchasing services from outside the UK.