Value Added Tax (VAT)

In this article:

What is VAT?

Value Added Tax or VAT is a tax that is charged on the sale of goods and services and is levied on the final consumer. VAT is charged on the supply or items in the UK but can also affect items imported from within and outside the EU.

Taxable supplies relate to all products and services where VAT is levied. If a company makes a taxable supply they must add VAT at a rate of 20% to the invoice amount. This practice will be effective from the first date the company becomes registered.

VAT is charged on things like:

  • business sales - e.g., when you sell goods and services 
  • hiring or loaning of goods to someone
  • selling business assets
  • commission
  • items sold to staff - e.g., canteen meals
  • business goods used for personal reasons
  • non-sales like part-exchange, bartering and gifts

There are some items on which VAT does not have to be charged. These items fall into two categories: Zero-rated supplies and Exempt supplies. 
For the purposes of VAT rates, there are effectively 3 rates at which VAT could be charged in the UK.*

  • 20% - the standard rate for most goods and services
  • 5% - the rate used for standard goods and services, e.g., books and newspapers
  • 0% - the rate used for goods and services, e.g., most foods, drinks and children's clothes

* Based on HMRC 2014 rates

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When you must register for VAT 

You are legally required to register for VAT if:
  • your company's turnover is more than £85,000 in a 12 month period
  • you receive goods in the UK from the EU worth more than £85,000
  • you expect to go over the threshold in a single 30 day period
There are fines and penalties available to HM Customs and Excise should a registration application not be made at the correct time. 
You must register within 30 days of your business turnover exceeding the threshold. If you register late, you must pay what you owe from when you should have registered.

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Voluntary VAT registration

You can register for VAT voluntarily (your own choice) if your business turnover is below £85,000. However, you must pay HMRC any VAT you owe from the date they register you. 
Advantages of voluntary VAT registration for your company: 
  • customer and suppliers may view your company as a bigger business
  • if all or the majority of your company's sales are at the zero rate, it would be eligible to reclaim the VAT it has been charged
Disadvantages of voluntary VAT registration for your company: 
  • the extra burden on the administration, submitting returns, making calculations
  • charging VAT on certain products/services may be off-putting to customers
  • preparing and maintaining accurate VAT accounting records

If you're still unsure, we recommend you speaking to an accountant or tax adviser if you want further advice.

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Your VAT responsibilities

From the effective date of registration you must:

  • charge the right amount of VAT
  • pay any VAT due to HMRC
  • submit VAT Returns
  • keep VAT records and a VAT account
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Charging your clients or customers VAT

You cannot charge your clients or customers VAT if you are not VAT registered. Neither can you charge or show VAT on your invoices until you get your VAT number. 
You should increase your prices to allow for this and tell your customers why. Once you’ve got your VAT number you can then reissue the invoices showing the VAT.  

If you sell, supply or transfer goods out of the UK to someone in another country you may need to charge VAT on them. Check  Companies House for further information.

Please note, once you are VAT registered, you’ll still have to pay the VAT to HMRC for this period (even if you were not VAT registered at the time). 

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Reclaiming VAT

You can backdate claims for VAT before registration. To reclaim VAT, visit the HMRC website.

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How to register for VAT

We can help you register for VAT through our VAT Registration Assistance service, or you can register directly via HMRC. You must meet the requirements before registration for VAT. Further information can be found in the VAT FAQs.

A UK bank account must be held in the UK, and the name of the account must match the business name when registering for VAT.

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VAT Flat Rate Scheme

The amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

With the Flat Rate Scheme:

  • you pay a fixed rate of VAT to HMRC 
  • you keep the difference between what you charge your customers and pay to HMRC 
  • you can’t reclaim the VAT on your purchases - except for certain capital assets over £2,000

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT). See our VAT FAQs for more information.

New rules from 1 April 2017

You’ll be classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you’ll pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

If you aren’t a limited cost business, continue to use your business type to  work out your flat rate.

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