I’ve blogged before about how VAT works, so here, I’m just going to highlight the symmetry of the VAT chain in the UK by considering a hypothetical supply chain of VAT-registered businesses, Company, A, B, C.
Company A makes a widget and sells it to Company B for £100+VAT = £117.50
Company A’s output VAT (the VAT on it’s sale) is £17.50 which it pays to HMRC
Company B’s input VAT (the VAT on it’s purchase) is also £17.50 and can be reclaimed, giving a cost of only £100
Company B does a bit of additional work and sells the super widget to Company C for £150+VAT = £176.25
Company B’s output VAT (the VAT on it’s sale) is £26.25 which it pays to HMRC
Company C’s input VAT (the VAT on it’s purchase is also £26.25 and can be reclaimed, giving a cost of only £150
Company C does a bit more work and sells the resulting super-duper widget to D for ££200+VAT = £235
Company C’s output VAT (the VAT on it’s sale) is £35 which it pays to HMRC.
Let’s suppose that D, is a private individual, who is therefore not registered for VAT.
D therefore cannot reclaim the £35 of VAT that it’s paid.
So the total cost to D is £235.
D bears the entire cost of the eventual VAT charge.
If a business is making zero-rated supplies, (ie, the products or services it sells), it charges VAT at zero percent, as opposed to charging no VAT. The distinction, although pedantic, is important: These businesses can reclaim all the VAT on the purchases.
(Some examples of zero-rated goods are given here)
If a business is making exempt supplies, it cannot charge VAT on it’s sales and it cannot reclaim the input VAT on it’s purchases.
If a business makes only some exempt supplies, it would only be able to claim the VAT on purchases related to it’s VATable supplies. (The Partial Exemption area of VAT is a whole huge area of VAT rules, in itself, which I will address in a later post)
A business that is unregistered for VAT or a private individual, is completely outside the VAT system. Obviously, they cannot charge or reclaim any VAT at all.
HMRC deems these businesses and individuals to be “out of scope“.