VAT vs GST Tax in UK: What’s the Difference & When to Charge It

While VAT (Value Added Tax) is the tax system in place in the UK, GST (Goods and Services Tax) is used in many countries around the world, but not in the UK. This can be tricky especially for business owners trying to understand the different tax laws.

So, what’s the deal with VAT and GST in the UK, and when should you charge each?

In this article, you’ll get to know:

• How VAT And GST Works,
• Key Differences Between VAT And GST,
• When Do Businesses Need To Charge VAT,
• And Much More…

Let’s get started!

• How to define VAT?
• What is GST?
• Major Differences between VAT and GST

What Are VAT and GST?

Value Added Tax (VAT)

VAT is a type of sales tax applied to most products and services in the UK. Businesses collect VAT on behalf of the government by adding it at every stage of production or service. Ultimately, it is the consumer who pays for it.

In short, when a business sells something, they add VAT to the price and the customer covers the cost.

Key Points About VAT:

• VAT is a sales tax.
• VAT applies to both goods and services in the UK.
• Businesses collect VAT on behalf of the government, passing it on to the authorities.
• The UK uses different VAT rates based on the product or service being bought.

The Different VAT Rates in the UK

Here are the main VAT rates you’ll come across in UK:

• Standard Rate (20%): This is the usual VAT rate for most products and services.
• Reduced Rate (5%): This applies to specific goods and services, such as home energy.
• Zero Rate (0%): Goods like books, food, and children’s clothing often fall under this category.
• Exempt (No VAT): Some goods and services, such as insurance or education, are exempt from VAT.

Goods and Services Tax (GST)

GST is a consumption tax used in many countries but it is not used in the UK. Countries like Australia, Canada and India apply this tax.

Similar to VAT, businesses charge and collect GST on goods and services on behalf of the government.

Key Points About GST:

• GST is also a form of indirect tax, just like VAT.
• The GST rate can differ depending on the country and the type of goods or services.
• GST is also a multi-stage tax like VAT. It is collected by businesses at each step of the supply chain.

VAT vs GST – Key Differences

 

Aspects	VAT	GST
Tax Rate	20% (standard), reduced, & zero	5% – 15%, varies by country
Applicable Countries	UK	Australia, Canada, India, etc,
Registration Threshold	£90,000 turnover for compulsory registration	Varies by country
Exemptions	Some goods and services are exempt (e.g., healthcare, education).	Some goods/services may be exempt depending on the country’s policies.
Administration	Managed by tax authorities within individual countries (e.g., HMRC in the UK).	Managed by central tax authorities, though specifics vary by country.
Impact on Business	VAT increases the final price of goods/services.	GST also increases the cost of goods/services but can have a broader scope in certain regions.

How VAT Works?

VAT works by being added at each stage of the production or supply chain. For instance, if a business buys goods to make a product, they pay VAT on those goods. When the product is sold, the business collects VAT from the consumer. The business then remits the VAT they’ve collected to the government, minus the VAT they’ve already paid on their purchases.

Steps to Follow When Charging VAT

1. Register for VAT: You need to register with HMRC if your taxable turnover goes over £90,000.
2. Charge VAT: Apply the correct VAT rate to your invoices.
3. Keep Records: Keep track of all transactions for VAT purposes.
4. Submit VAT Returns: Submit your VAT returns to HMRC. Usually, on a quarterly or annual basis.
5. Pay VAT: If the VAT on your sales is higher than the VAT on your purchases, you’ll need to pay the difference to HMRC.

How GST Works?

Although GST isn’t used in the UK, it works in a similar way to VAT in countries where it is implemented. However, the rules and administrative systems can vary greatly from one country to another. For example, in Canada, the federal GST is combined with provincial taxes. And, in India, a dual system with both state and central components is in place.

Steps to Follow When Charging GST

1. Register for GST: Businesses with a turnover above a country-specific threshold need to register for GST. The threshold can vary by industry and location.
2. Charge GST: Include the GST rate on your sales invoices
3. Reclaim Input Tax: Businesses can reclaim the GST paid on purchases to lower their tax liability.
4. Submit GST Returns: Regular returns must be filed showing the amount of GST collected and paid.

Pros and Cons of VAT and GST

VAT (Value Added Tax)

Pros:

• Transparency: VAT is clearly stated on invoices which makes it easy for customers to understand the tax they’re paying.
• Reclaim VAT: Businesses can reclaim VAT on purchases which reduces their operational costs.
• Encourages Growth: VAT encourages growth by providing a tax refund on input costs. Businesses can reinvest the savings into their operations.

Cons:

• Administration: VAT returns and record keeping can be time consuming for businesses.
• Complexity: Different rates for various goods and services might lead to confusion.
• Cash Flow: Businesses must pay VAT to HMRC even if they haven’t received payment from customers yet.

GST (Goods and Services Tax)

Pros:

• Simple to Implement: GST is simpler in countries where it is implemented. It has fewer variations than VAT.
• Input Tax Credit: Just like VAT, GST allows businesses to reclaim tax paid on purchases.
• Wider Reach: GST often applies to a broader range of goods and services than other taxes.

Cons:

• Higher Rates: In some countries GST rates are higher than VAT rates in the UK.
• Additional Burden: Businesses must track GST on every transaction. And this can be time consuming.
• Limited Exemptions: Certain products and services may not qualify for GST exemptions. This leads to higher tax burdens.

When Is VAT or GST Registration Required?

For VAT registration, UK businesses must register with HMRC if their taxable turnover exceeds £90,000. For GST, countries where GST is applied have different registration thresholds, so businesses need to check the specific rules in their region.

How to Manage Your VAT and GST Obligations

Managing VAT and GST requires proper planning and compliance with tax laws. Here’s how you can keep your VAT or GST obligations in check:

1. Register: Ensure your business is registered with the appropriate tax authority.
2. Maintain Records: Keep clear records of transactions to simplify VAT/GST reporting.
3. File Returns: Submit VAT or GST returns within the required timeframe to avoid penalties.
4. Reclaim Tax: Reclaim VAT or GST on your business purchases where applicable.

Does the UK Have GST?

No, the UK does not have a Goods and Services Tax (GST). Instead, the UK uses VAT (Value Added Tax) as the standard indirect tax on goods and services.

When Do UK Businesses Need to Charge VAT?

UK businesses must charge VAT if they’re VAT registered and their taxable turnover goes over £90,000 in a 12-month period. Or if they expect to exceed that threshold within the next 30 days. Once registered, you need to start accounting for VAT from the registration date. However, you must not issue invoices showing VAT until you have received your official VAT registration number from HMRC.

VAT vs GST – Which Tax System Is Better?

It’s not necessarily about one being better than the other as both VAT and GST serve similar functions. However, each country has its tax system in place, and what works in one country may not apply in another. For UK businesses, VAT is the way forward, as it’s the system that’s in place.

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The Bottom Line

In the UK, VAT is the primary tax system for goods and services, while GST is used in many other countries. While they operate similarly, the main difference lies in the country of application and the minor details of their tax structures.

For UK businesses, understanding when to charge VAT, how to register, and which items are exempt is essential for staying compliant with tax laws.

Always stay updated about changes to tax laws to make sure your business stays ahead.

We Can Help

At Accotax, we specialize in helping businesses manage complex tax systems. Whether you need assistance with VAT registration, filing returns, or understanding your obligations, our expert team is ready to help. Let us take care of your tax processes, so you can focus on growing your business.

Disclaimer: All the information provided in this article on VAT vs GST Tax in UK: What’s the Difference & When to Charge It, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.