VAT stands for value-added tax and it’s charged on most purchases in the UK. It’s also charged along with import duty on goods that are imported from outside the European Union.
Like other taxes, VAT is administered by HMRC and you will need to self-report. You can register as a company, or as an individual.
Why register for VAT?
VAT is required for businesses with an annual turnover of more than £85,000, although the threshold continues to rise.
Many sole traders and limited companies register on a voluntary basis. It’s perfectly legal, and very common – roughly one fifth of all VAT-registered businesses are trading below the threshold.
The most attractive reason is that you can claim back VAT, which is typically 20%. If you are charged more VAT than you collect, you will actually receive a refund from HMRC.
Practices vary across businesses, so you should think about how your customers will perceive the tax. If none of your competitors charge VAT, the extra 20% may be a deterrent. In comparison, people expect goods like food to be taxed.
If you mostly work with other VAT-registered companies, it’s likely everyone will benefit.
Who can’t register for VAT?
Firstly, you must meet HMRC’s definition of a business for VAT purposes. A hobby that you very occasionally sell wouldn’t count, for example.
If your business sells mainly products or services that are exempt from VAT, you cannot register for a VAT number. (This is fairly straightforward – if you did, you would receive a refund every quarter rather than paying any tax.)
There’s a wide range of goods and services that are VAT-exempt or charged a lower rate. These include:
- Most food and drink
- Children’s clothing
- Sports activities
- Education and cultural events from qualifying bodies
Check the full list here.
How to register for VAT
When you sign up, you will have the choice of joining the flat rate scheme, cash accounting scheme or annual accounting scheme.
- The flat rate scheme makes accounting easier by charging a fixed rate on turnover, rather than varying rates depending on product or service. Your turnover must be under £150,000 to qualify for this scheme.
- The cash accounting scheme means that you don’t need to pay VAT until you receive payment from your customers, for example if you use invoices. It’s designed to reduce cashflow issues in businesses making less than £1.35 million annually.
- The annual accounting scheme does what it says on the tin – you can choose to send one yearly VAT return along with advance payments based on previous years’ income. It means you don’t have to send a return every quarter.
Once registered, you will be issued a unique VAT number. You should receive a registration certificate within 30 days.
You will then need to add 20% on top of any taxable products or services you sell, and keep track of all sales and purchases.
How to pay VAT
Every three months you will complete a VAT return showing how much you have collected in VAT (called output tax) and how much VAT you have paid to your suppliers (known as input tax). You will need to pay HMRC the difference online or through your bank – cheques aren’t accepted.
If the tax you paid is higher than the amount you collected, you will receive a refund. This will typically be issued within 30 days of your VAT return being received. If HMRC have your banking details, it will go directly to your account; otherwise, you’ll receive a cheque in the post.