VAT, a consumption tax levied on the sale of goods and services, is a crucial aspect of the UK tax system. It’s also fairly complex, especially for smaller businesses that want to keep their accounting in-house.
But whether you’re a start-up or an established enterprise, knowing basic things about VAT—like when and how to register for VAT, determining the correct amount to charge, and ensuring timely and accurate filing of VAT returns—is essential. This guide will guide you through each one to help you stay compliant with all your VAT obligations.
What exactly is VAT?
VAT is a tax that certain businesses apply to the goods and services their customers pay. Those businesses then report the VAT they collect and send it to HMRC. In that sense, VAT-registered businesses collect tax on behalf of the government.
When and how do I register for VAT?
You must register for VAT when your taxable turnover exceeds £90,000 in a 12-month period. Specifically, you must register within 30 days of the end of the month when you first exceed the threshold.
You must also register if you expect our turnover to exceed £90,000 in the next 30 days. Again, you must register by the end of that 30-day period.
You also have to register (regardless of your VAT taxable turnover) if all the following are true:
- you’re based outside the UK
- your business is based outside the UK
- you supply any goods or services to the UK (or expect to in the next 30 days).
If your turnover is below the threshold, you can choose to register, which HMRC calls ‘voluntary registration’. This can help boost cashflow, improve your business’s credibility, and allow you to reclaim the VAT your business pays on purchases.
You can register for VAT on the government website. There, you’ll find information on the documents you need to register depending on whether you do business as a sole trader or through a limited company.
How much VAT should I be charging?
The amount of VAT you charge depends on the type of goods or services you provide. There are three rates of VAT that you need to apply to your goods and services, and tell HMRC about:
- Standard rate (20%): Most goods and services, including non-essential food and drink; clothing and footwear (excluding children’s items); leisure activities, and hairdressing and beauty services.
- Reduced rate (5%): Some goods and services, including certain energy-saving materials and installations; domestic fuel and power, and children’s car seats.
- Zero rate (0%): This applies to specific goods and services, including education and training, health services, and charitable activities.
Some goods and services are also VAT-exempt. These are different from zero-rated goods and services in that businesses cannot reclaim VAT on VAT-exempt goods and services that they purchase, but you can reclaim VAT on zero-rated goods and services (see ‘Can I reclaim VAT?’).
How do I file a VAT return?
Once registered for VAT, you must submit regular VAT returns, usually quarterly, to report the amount of VAT collected and paid. These returns must be submitted even if there is no VAT to repay or reclaim.
As per the rules of Making Tax Digital, VAT-registered businesses have to keep digital records and use compatible software to submit their returns. The best type of software to use is cloud accounting software, like Xero and Sage. They’re easy to use and host a range of other digital tools to assist in your financial management.
Can I reclaim VAT?
If you’re a VAT-registered business, you can reclaim VAT on goods and services exclusively used for your business. To do so, you need to include details of the tax you’ve paid on your goods and services.
VAT repayments are then usually made within 30 days of HMRC receiving your VAT return. If HMRC has your bank details, your repayment will go straight to your account. If not, you’ll be sent a cheque.
We can help with your VAT obligations
Navigating the complexities of VAT can be challenging, but you don’t have to do it alone. Our comprehensive VAT services are designed to help UK businesses manage their VAT obligations efficiently and effectively. Whether you need assistance with VAT registration, determining the correct VAT rates, or ensuring compliance with MTD requirements, our team of experts is here to support you every step of the way.
Get in touch with us today.
