VAT doesn't need to be a complete headache.
If you've started hearing people talk about VAT thresholds, input VAT, output VAT and quarterly returns, you might be wondering what any of it actually means.
And when you're busy running a business, the last thing you want is an unexpected registration problem.
Let's cover the basics.
What is VAT?
VAT stands for Value Added Tax.
It's a tax charged on many goods and services supplied by VAT-registered businesses.
When a VAT-registered business makes a taxable sale, it generally charges the appropriate VAT rate and accounts for that VAT to HMRC.
Depending on the circumstances, it may also be able to reclaim VAT charged on qualifying business purchases.
When do you have to register for VAT?
The current UK VAT registration threshold is £90,000.
You generally need to register if:
Your total VAT-taxable turnover over the previous rolling 12 months exceeds £90,000.
You expect your VAT-taxable turnover to exceed £90,000 in the next 30 days alone.
There are also separate rules for certain businesses established outside the UK.
It's turnover, not profit
This is important.
If your business has made £95,000 in taxable sales and has £60,000 in expenses, you don't simply look at the £35,000 profit and decide VAT doesn't apply.
VAT registration is generally based on taxable turnover.
And the rolling 12-month test isn't limited to your accounting year.
What are the VAT rates?
The main UK VAT rates are:
20% standard rate
Applies to most taxable goods and services.
5% reduced rate
Applies to certain goods and services where specific conditions are satisfied.
0% zero rate
Applies to qualifying zero-rated goods and services.
Some supplies are VAT exempt, which is different from zero-rated.
This distinction matters for turnover tests and recovering VAT on purchases.
What happens once you're registered?
Depending on your VAT accounting scheme, you'll need to:
Charge the correct VAT on relevant sales.
Issue VAT invoices when required.
Maintain appropriate VAT records.
Prepare and submit VAT returns.
Pay VAT liabilities on time.
Use compatible software for Making Tax Digital for VAT.
Can you reclaim VAT on purchases?
A VAT-registered business can often reclaim input VAT on qualifying purchases used for taxable business activities.
However, there are restrictions.
Private spending, exempt activities, certain entertainment costs and other special categories can affect VAT recovery.
Don't automatically reclaim every amount of VAT shown on an invoice.
What if you sell online?
E-commerce businesses need to pay particular attention to their sales records.
For example, the money deposited into your bank account from Shopify, Amazon or another marketplace may be after fees, refunds and adjustments.
That doesn't necessarily represent your gross sales or correct VAT turnover.
International sales can also involve special place-of-supply, export, import and marketplace rules.
What about the Flat Rate Scheme?
The VAT Flat Rate Scheme allows eligible businesses to calculate their VAT payments using a sector-specific percentage of their VAT-inclusive turnover.
It has its own eligibility criteria and limited cost trader rules.
It isn't automatically the cheapest or simplest option for every business.
How often are VAT returns due?
Many VAT-registered businesses submit quarterly returns, although different VAT accounting arrangements are possible.
For a typical quarterly return, the filing and payment deadline is generally one month and seven days after the end of the VAT period.
Always check your actual VAT obligations and deadlines in HMRC's online services.
Common VAT mistakes
Businesses can run into problems when they:
Track VAT using profit instead of taxable turnover.
Ignore the rolling 12-month threshold.
Treat marketplace payouts as total sales.
Apply the wrong VAT rate.
Reclaim VAT without sufficient evidence.
Leave bookkeeping until the return deadline.
Overlook VAT implications of international sales.
How AOY helps
Accounting On You supports VAT-registered businesses with bookkeeping, VAT returns and ongoing accounting advice.
We help clients keep their records organised and understand what they need to put aside.
VAT is complicated enough. Your accountant shouldn't make it worse.
Explore our VAT support at www.accountingonyou.com.
General guidance. VAT treatment depends on the supplies made, customer location, registration status and applicable scheme.