A brief introduction to VAT

Value Added Tax or ‘VAT’ is a tax based on the value of goods or services. It’s important to manage VAT as part of running a small business, so we’ve put together this simple guide to get you up to speed on the basics.

How does UK VAT work?

VAT is essentially a tax on sales in the UK.

If a business is registered for VAT, then it has to charge VAT on all its taxable sales - this is called output VAT. It’s also entitled to claim back most (but not all) of the VAT that it’s charged by its suppliers - this is called input VAT.

Making Tax Digital (MTD) for VAT is here

Following the introduction of the Making Tax Digital (MTD) initiative on 1st April 2019, VAT-registered businesses need to file their VAT returns to HMRC using MTD-compatible software like FreeAgent. You must send your information to HMRC digitally at least four times a year via your digital tax account, so you won’t have to wait until the end of the year to find out how much tax you owe.

Should I be registered for VAT?

If your business’s annual VATable sales go over the VAT threshold set by HMRC in a 12-month period (which you should check regularly), or you expect the limit to be broken in the next 30 days, you need to register your business for VAT.

The registration threshold usually changes every year and is currently £85,000. While the VATable sales limit is the main factor, there are others as laid out by HMRC.

You can usually register for VAT even if your VATable sales aren’t up to the limit. However, if your business is making only exempt sales, then you can’t ever register for VAT.

The majority of businesses register for VAT online, creating a Government Gateway user ID to submit VAT returns to HMRC. Alternatively you can appoint an accountant to submit your VAT returns on your behalf. If you undertake VAT registration online, there is still the option of doing so by post and filling out the relevant form.

What are VAT "exempt sales"?

Most goods and services sold in the UK are VATable. However, some are exempt from VAT, such as stamps, insurance and education. So if you're a home tutor who sells nothing but your teaching services, for example, you'll never have to register for VAT because your business will only ever make exempt sales.

When should I register for VAT?

If your customers aren't registered for VAT, they won't be able to claim back input VAT on the goods and services they buy from you. As a result, your business registering for VAT effectively represents a price increase to them.

If your customers are members of the general public (e.g. you're a jobbing gardener) or are small businesses who might not have registered for VAT yet (e.g. you're a virtual assistant), then you'd be well advised to delay registering for VAT for as long as you can. Otherwise you'd be stuck with either passing on a price increase to your customers, or taking a profit cut.

If you don’t pay your VAT on time, you’ll receive potential visits from inspectors, and could incur interest and penalties.

Got questions?