If you’re reading this blog, you’re one of two people. You either read a heap of VAT articles because they’re your ultimate guilty pleasure, or you’re VAT-registered (or wondering if you should be) and want to know more about what that means.
We’ll assume you’re the latter, and if that’s the case then we’re here to furnish you with the facts and figures you’ll need to ensure you sign up for VAT when you should, accurately record the amount of VAT you charge to your customers, and the amount you’ve paid when purchasing from other businesses.
Keeping track of this can seem overwhelming, but it’s crucial to make sure everything is in order when it’s time to complete your VAT returns.
It can be a lot to get your head around, so we’ll explain everything from the beginning.
What is VAT?
VAT stands for value-added-tax and is a tax applied to most goods or services. It’s an indirect tax because it’s paid to the government by the seller, rather than the consumer.
If you want to impress your acquaintances at lunch with a bit of history, VAT came about in 1973, replacing the purchase tax. We can’t promise that fact won’t put them to sleep.
Who needs to register for VAT?
You need to register for VAT if your taxable turnover reaches the VAT registration threshold of £90,000 in a consecutive 12-month period, or if it looks like it will hit the threshold within the next 30 days. The term ‘taxable turnover’ refers to your business’s income, excluding any goods or services which are exempt from VAT.
Monitoring your income and recording everything accurately will help you keep an eye on what’s happening in your business – and register for VAT when you need to!
Is anyone exempt from VAT?
If your business only supplies goods or services that are completely exempt from VAT, then you won’t be able to register or reclaim any VAT you’ve paid.
You can view a list of exempt goods and services online, but as a general guide it includes:
- Insurance
- Education and training
- Charity fundraising
You may sell mainly zero-rated products. If this is the case you can apply for an exemption from VAT registration, even if you hit the VAT threshold.
If you believe you’ve hit the VAT threshold as a one-off and you don’t like the idea of now becoming VAT-registered, you can apply for a registration exception using a postal VAT1 form.
How to register for VAT
Registering for VAT is pretty straightforward, and you can do this online using your Government Gateway ID and password.
You don’t have to complete your registration in one go, so if you can’t find something and need to look down the back of the sofa for it, you can always save it and go back to it later!
You’ll be required to provide different types of information depending on your business structure. For instance, if you’re a limited company you’ll need your business’s bank account details, your UTR number and company registration number (as well as details of your annual turnover).
The .Gov website has a full list of what you need, as well as a link to the VAT registration section.
If you’d rather do it by post, you can use a postal VAT1 form, or if you need help completing your registration online, you can use an agent to act on your behalf.
Should I voluntarily register for VAT?
This depends on your own circumstances. Voluntarily registering could be more tax-efficient, because whether you’re registered or not, you’ll pay VAT whenever you purchase something from a VAT registered business. There are two sides to think about as a VAT registered business:
- Input tax – the VAT your business will pay on purchases whether you’re VAT registered or not
- Output tax – the VAT your business will charge on taxable sales when VAT-registered
If, for instance, you know your business is likely to pay more in VAT than it would charge to customers on a regular basis, it may be beneficial to register as you can then reclaim the difference. We say on a regular basis because you might not want to go to the effort of registering if this is just a one-off.
If it were the other way round, you’d need to pay the difference, which would make it less tax efficient. Have a look at the things which you typically buy and sell to identify how much VAT is being charged (or would be if you were to register).
How do I charge VAT to customers?
Calculating how much VAT to add onto your prices is much easier than you think – we promise you don’t need to be a mathematician to work it out (especially as most of us normally have access to a calculator app at any given moment).
There are only 3 rates of VAT used in the UK, with the majority of goods and services coming under the standard rate of 20%.
The different rates of VAT in the UK
| Type | Rate | What it applies to | How it’s calculated |
| Standard | 20% | Most goods and services | Multiply the original price by 1.2 You charge for services at £20 per hour. 20 x 1.2 = 24. Your bill to the client is £20 plus £4 VAT (or £24 including VAT) per hour. |
| Reduced | 5% | Items such as children’s car seats, home energy, and mobility aids. | Multiply your original price by 1.05. You sell car seats for £50. 50 x 1.05 = 52.5. This will make it £50 plus £2.50 in VAT (or £52.50 including VAT). |
| Zero | 0% | Most food and children’s clothes, newspapers and books. Even though no VAT is charged, you must still record these on your VAT return. | Do nothing (hurray). Just ensure you mention on your invoice the reason why it’s zero-rated and include it in your VAT return. |
If you can’t be bothered doing sums, we do have good news. VAT calculators are available online, or you can use very efficient MTD compliant accounting software which includes invoicing features, and it will work everything out for you.
But it is a handy little sum to know just in case your Wi-Fi goes down, or you’re forced to calculate VAT by a wild-eyed Maths teacher. Check out gov.uk for a list of things that fall under each of these categories.
Is zero rating something the same as being exempt from VAT?
Even though there’s a category for zero-rated goods and services, there are also things that are exempt all together. Meaning you don’t charge any VAT on them or record them on your VAT return. Exempt goods include education and training, fundraising events by charities, and any insurance, finance, and credit.
How do I reclaim VAT?
You’ll usually be able to reclaim any VAT due back to your business once you’ve made your VAT submission. After you submit, your VAT account will show whether you need to pay a balance to HMRC, or you’re due a refund. You’ll make VAT submissions according to which VAT accounting scheme you’re on – most commonly on a quarterly basis.
Which VAT accounting scheme should I use?
Some schemes do have eligibility criteria but as long as your business meets those, it’s pretty much up to you which VAT accounting scheme you use. There are several schemes available, but we’ll go over some the most common ones below.
Standard VAT accounting scheme
Most businesses use this scheme. You’ll record the VAT you pay on purchases you make, as well as every taxable sale. When you submit a VAT return at the end of each VAT quarter (every 3 months), you’ll then either reclaim VAT owed to you or pay the difference.
VAT annual accounting scheme
This is where you’ll make a VAT submission to HMRC once a year. You pay an estimate of what’s due which is calculated from the previous tax year. You can make payments in quarterly instalments, or monthly spread over 9 months.
VAT flat rate scheme (FRS)
This one is for businesses who have an annual taxable turnover of £150,000 or less. You’ll still charge VAT as normal, but you can avoid all the accounting requirements and pay a flat rate of VAT instead – this is based on a percentage of your annual turnover.
Using the flat rate does mean you won’t be able to reclaim any VAT back, but the flat rate you pay will (in most cases) be lower, so it makes up for it.
How do I keep records for VAT?
Businesses are required to record all their VAT information digitally, such as with a spreadsheet or accounting software. A spreadsheet can work well, although it can involve a bit of messing about when it’s time to export the records and use bridging software to send them off to HMRC.
The other option is accounting software! If you wanted to use Pandle (although other software is available), your VAT returns are calculated in real time whenever you add or update a transaction, so that everything’s ready to send to straight to HMRC. Like magic.
Of course, do what feels right for your business, so if spreadsheets are your thing, ensure you have them checked by an accountant so you know they’re correct.
Learn more about how Pandle bookkeeping software can help you keep your business on track, and register your free account.
