If you are running your own business, you might be wondering what you need to do in terms of VAT registration. It is one of the many things you need to consider when owning a business in the UK.
To answer your questions about VAT (Value Added Tax) and how to register, we’ve written this guide to help you get started. Read on to find out everything you need to know about VAT.
What Is VAT?
Value Added Tax, or VAT, is a term used to describe a UK tax on the consumption of goods and services. Businesses charge VAT to clients and pay VAT on purchases.
Here’s a quick three-point summary:
- Businesses that have a turnover over £85,000 per year need to register for VAT.
- If a business is VAT-registered, it must VAT to invoices issued to customer and to the price of products or services it sells. The business can also claim back VAT it has paid to other businesses. If the business has a higher total of VAT on its sales that VAT paid for purchases, then it needs to pay the difference between the two to HMRC. If it’s the other way around and the business has paid out more VAT on purchases than it has made on sales, then the business can claim a refund from HMRC.
- Lastly, although the standard rate of VAT is 20%, there are different rates depending on the type of product or service – it can be 0% or 5% or 20%.
Example of VAT
For most businesses, once registered VAT is charged at 20%. This means that if you issue an invoice it would need to include a line for VAT that is 20% of the total of all the products or services. For example:
Materials used £200
Hours worked £600
VAT at 20%: £160
Total payable: £960
How much VAT should you charge?
The standard rate of VAT in the UK is 20% and this applies to most products and services sold. This means that if your business is VAT-registered you will probably be using a rate of 20%. As a simple example, if you invoice a customer £200 for your services, the VAT would be an additional £40 to the total payable by the customer would be £240.
Reduced rates of VAT
There are some products that should be taxed at a reduced rate of 5%. For example, the list includes:
- a child’s car seat
- home energy supplies
- energy-saving materials (eg insulation or solar panels)
- mobility aids (eg a mobility scooter for the elderly)
- nicotine patches and gum
In addition to these products, there are some services that should also be taxed at a reduced rate of 5%. This includes some building services such as renovating a dwelling that has been empty for more than two years or converting a building to increase the number of dwellings.
Keep an eye on the HMRC website to monitor the VAT rates of different products and services since it does change.
Does my business need to register for VAT?
In the UK, if your company’s VAT-taxable turnover exceeds £85,000, you must register for VAT.
The total amount of everything you sell that isn’t VAT-exempt constitutes your VAT chargeable turnover. Sales of lottery tickets, postage stamps or services, and certain financial services are free from VAT, almost everything else needs to be included.
You’ll find the latest definition of what to include in your VAT taxable turnover calculation on the HMRC website and it should include:
- the total value of everything you sell that is not exempt from VAT
- the value of zero-rated goods (note that 0% rate is different from exempt)
- any goods you hired or loaned to your customers
- any business goods used by employees for personal reasons
- any goods you bartered, part-exchanged or gave as gifts
- any services you received from businesses in other countries that you had to ‘reverse charge’
- any building work over £100,000 your business did for itself
Once you’ve registered, HMRC will send a VAT registration certificate. This will confirm your:
- First VAT return and payment details
- Effective date of VAT registration
- VAT number
You may still be required to pay VAT during this time even if you cannot charge or disclose VAT on invoices until you get your VAT number. According to the UK government website, you should raise your prices to account for this.
From your effective date of VAT registration, you will need to:
- Pay any VAT that’s due
- Submit VAT returns
- Charge VAT correctly
- Keep VAT records
- Use a VAT account
- Follow HRMC’s Making Tax Digital for VAT rules
How do I register for VAT online?
Utilising your Gov.uk business tax account, it’s simplest to login and register online via the Gov portal. Find out more at on the VAT registration hub run by the UK Government.
A representative, such as an accountant or tax advisor, can also register your firm and handle HMRC matters on your behalf.
How do I register for VAT by post
Some firms must download a VAT1 form and send it by post if they can’t register online. This includes companies that are:
- Applying for a VAT registration exemption
- Using separate VAT numbers to register different parts of the business
- Joining the Agricultural Flat Rate Scheme
Do I have to register for VAT?
You must register by law if your annual revenue exceeds £85,000. However, you may choose to register voluntarily for VAT.
You can get the VAT back on your purchases if you register for VAT. Reclaiming VAT makes up the difference if you pay out more in VAT than you take in from customers.
Because you won’t need to keep an eye on your turnover, it also indicates you’re prepared for expansion.
The downside of VAT registration is that it requires extra paperwork, and you may occasionally have to pay more to HMRC if you collect more VAT from customers than you expend. When determining whether to register for VAT, it is best to consider the particulars of your company.
When Should I Register For VAT?
VAT registration becomes legally mandatory when:
- you expect your VAT taxable turnover to go over £85,000 in the next 30-day period
- your business had a VAT taxable turnover exceeding £85,000 over the last 12 months
Remember that these calculations are made continuously, so it is not sufficient to evaluate your taxes once a year and register if your income has risen above the threshold. You must regularly monitor your rolling 30-day and 12-month periods and register by the deadline.
Submitting a VAT return
You inform HMRC of the amount of VAT you have collected from and paid to other firms when you submit a VAT return. A VAT return must typically be submitted to HMRC every three months.
It’s simple to become confused by the boxes on a VAT return and the required information. If you need to know more about sending a VAT return, visit the UK government website.
As previously indicated, as part of Making Tax Digital, you must maintain digital VAT records and submit your return using accounting software.
What is the deadline for a VAT return?
Most firms are required to submit a VAT return and pay their bill on a quarterly basis when it comes to VAT deadlines.
One month and seven days following the conclusion of your VAT period, you must send your return and make the required VAT payment.
There are several deadlines because some companies offer monthly payments.
The annual accounting plan may attract more participants. Due dates for quarterly VAT are eliminated because of this. Instead, you pay your fee in advance and submit only one return each year.
This program won’t work for companies who frequently claim VAT because they will only receive one refund per year due to the annual frequency.
Can I get a VAT exception?
You can request an exception if you know you’ll just temporarily exceed the threshold.
You’ll need to provide supporting documentation for your assertion that your VAT taxable turnover won’t go beyond the £83,000 deregistration level in the upcoming 12 months.
HMRC will send you written confirmation if they accept your application. They will register you for VAT if you don’t.
Registering for VAT can be a confusing process, but with this guide and some extra information from the UK government website and your company’s financial advisors, you’ll be able to get your business VAT ready in no time at all.