Industry sector: Business services

Record label: VAT

Record companies and VAT

You will have to register for VAT if your taxable sales are likely to be above the current VAT threshold. You will then have to charge VAT at the standard rate of 20% on the goods you sell - this is known as 'output tax'. You will be able to reclaim any VAT you pay on purchases - this is known as 'input tax'.

Every quarter you will pay HM Revenue & Customs (HMRC) the difference between:

  • all the output tax you have charged
  • all the input tax you have paid on your purchases

Nearly all businesses have to pay their VAT bill electronically - for example by direct debit or online banking. HMRC allows you some time at the end of each quarter before you have to pay the VAT due. So, for example, the VAT due on sales made in months one, two and three would be paid at the end of month four. Your VAT return will show your payment deadline date.

Businesses that are having trouble making their VAT payments, or are worried that future payments will cause them problems, can ask for help from the HMRC Business Payment Support Service. If your business needs this financial assistance to tide it over, HMRC will look at your situation and discuss temporary options that could help out. These could include letting you make payments over a longer period and waiving late payment surcharges. To discuss payment problems with HMRC you can call the Business Payment Support Service Helpline on 0300 200 3835.

The sale of recorded music is standard rated, whether on physical media like CD or vinyl or in digital format - for example as a download from the internet. Some large download companies like Apple and Amazon previously took advantage of a loophole in the EU VAT 'place of supply' laws where the place of taxation was previously determined by the location of the supplier, meaning that they could base their download operations in an EU country where the VAT rate is low (for example Luxembourg) and only have to add that amount of VAT, rather than the standard UK rate of 20%. This meant that they were able to set the price of their downloads at a low level - typically 99 pence for a single.

From 1 January 2015 the place of supply laws changed, with the place of taxation now determined by the location of the customer. This means that all downloads bought by UK customers must have VAT at the standard UK rate added and downloads bought by customers in other EU Member States must have VAT at the appropriate rate added. Rather than register for VAT in every EU country that you expect to sell into, it's much simpler (and recommended by HMRC) to sign up to the VAT Mini One Stop Shop (VAT MOSS). There's further guidance about what you need to do - including advice if you're under the VAT threshold and the evidence you need to gather to prove the location of your customers - in the HMRC guidance 'VAT: supplying digital services to private consumers' that's available on the website. (Until the Brexit process has been fully completed - and possibly beyond - the VAT MOSS will continue to apply.)

Further information

You can contact the VAT Helpline on 0300 200 3700 to request further guidance and you can also download helpful leaflets like VAT Notice 700/1, Should I be Registered for VAT? from the website.

Making Tax Digital (MTD) for VAT

Under HMRC's Making Tax Digital initiative, VAT-registered businesses with taxable turnover above the VAT threshold must keep records digitally and use special software to submit their VAT returns. You can find out more about MTD on the website.

Alternative flat rate scheme

You might be interested in an optional flat rate scheme (FRS) for eligible small businesses. Under this scheme you continue to issue tax invoices to VAT registered customers, but the VAT payable every quarter is calculated as a percentage of your VAT-inclusive turnover. You apply the appropriate flat rate percentage for your type of business. This scheme cannot be used with the retail schemes, the margin scheme for secondhand goods or the cash accounting scheme. You can find full details of the FRS, who can use it, and the flat rate percentages in VAT Notice 733, Flat rate scheme for small businesses. It will help you to decide whether or not the scheme is suitable for you.