Value Added Tax (VAT) might not be the most thrilling topic for small businesses, but it’s an essential one. Getting it right can save you time, stress, and money. Whether you’re just starting out or you’re a seasoned pro, understanding your VAT obligations is a must to keep HMRC happy and your business on track.
In this guide, we’ll break down VAT essentials, including when to register, what records to keep, and how to avoid common mistakes that trip up small businesses.
What is VAT, and do I need to register?
VAT is a tax on goods and services charged at various rates depending on what you’re selling. In the 2024/25 tax year, the VAT registration threshold is £90,000. This means that if your taxable turnover exceeds £90,000 in a 12-month rolling period, you must register for VAT. This threshold hasn’t changed in recent years, so it’s worth keeping an eye on your figures to avoid falling foul of late registration penalties.
Even if your turnover is below £90,000, you might choose to register voluntarily. Why? It can make your business look more established to customers and allow you to reclaim VAT on purchases, although it does mean more admin.
Understanding VAT rates
Once registered, knowing which VAT rate applies to your sales is essential. These are the main rates:
- Standard rate (20%): Applies to most goods and services.
- Reduced rate (5%): Applies to certain items like home energy.
- Zero rate (0%): Covers essentials like most food and children’s clothing.
Some goods and services are exempt from VAT, like insurance or education. Misapplying VAT rates is a common error, so double-check the category of your goods or services.
Record-keeping: Your VAT safety net
If you’re VAT-registered, keeping accurate records isn’t just helpful – it’s a legal requirement. Here’s what you need to maintain:
- Invoices and receipts: Ensure they show your VAT amounts and registration number.
- VAT account: A summary of VAT charged on sales (output VAT) and paid on purchases (input VAT).
- Digital records: Under Making Tax Digital (MTD), all VAT-registered businesses must use compatible software to file returns.
HMRC can inspect your records, so it’s worth keeping them organised and easy to access for at least six years.
Filing VAT returns
VAT returns are usually filed quarterly, meaning four deadlines a year to keep track of. Each return shows the VAT you owe or can reclaim. You’ll need to pay HMRC any VAT due, or they’ll pay you if you’re reclaiming more than you’ve charged.
Be sure to file on time. Late submissions can lead to penalties under HMRC’s penalty points system. The penalty thresholds vary, but repeated delays can become costly.
Common VAT pitfalls to avoid
VAT mistakes can be costly, so here are some common pitfalls to watch out for:
- Missing the registration deadline
If your turnover exceeds the threshold, you must register within 30 days. If you miss this, you could face penalties and backdated VAT. - Not keeping proper records
Incomplete or incorrect records can lead to fines if HMRC decides to audit your business. - Claiming VAT incorrectly
You can only claim VAT on business-related purchases that meet HMRC’s criteria. Items like client entertainment are off-limits. - Ignoring MTD requirements
Filing returns manually or failing to use MTD-compliant software can land you in hot water.
Why get expert help?
Let’s be honest – VAT isn’t the most thrilling part of running a business. Between keeping track of thresholds, filing quarterly returns, and deciphering which VAT rate applies to your sales, it’s a lot to manage.
Unfortunately, getting it wrong can lead to penalties, unnecessary stress, and wasted time that could be better spent focusing on your business. That’s where we come in. We know VAT compliance inside and out and can handle the tricky parts for you, from registration to filing and everything in between. Need help understanding VAT rates? Not sure if you can reclaim VAT on certain expenses? We’re here to simplify the process and make sure you’re fully compliant without the hassle.
Whether you’re just getting started or you’ve been managing VAT for a while, expert advice can help you avoid common pitfalls, reduce admin, and ensure you’re not leaving money on the table. With us, you’ll have peace of mind knowing your VAT obligations are in safe hands.
Struggling with VAT compliance? Don’t let it take over your time and energy. Let us take the hassle off your plate. Contact us today for expert advice and support tailored to your business.
