The definitive guide to VAT

Learn how to become registered for VAT, which VAT scheme to register for, and how to charge VAT for your goods and services – plus how to pay VAT to HRMC and the deadlines you need to meet.

Contents
What is VAT?
Do I need to register for VAT?
How do I become VAT registered?
What documents do I need to register for VAT?
How do I pay VAT to HMRC?
How do I charge VAT?
What VAT scheme should I register for?

What is VAT?

Value Added Tax, or VAT as it’s more commonly known, is a tax that’s applied to the sale of goods and services. Firms that are registered for VAT collect this tax on behalf of the Government and all businesses that have a turnover greater than £85,000 must register for and charge VAT on their products and services.

The standard rate of VAT, currently 20 per cent, is charged on the majority of goods and services that businesses provide to their customers. This means that if your business charged £100 for a product or service, the customer would pay £100 plus £20 in VAT – at the standard VAT rate of 20% – resulting in a bill of £120.

Some goods and services, such as books, children’s clothing and dental services are exempt from VAT. Other goods and services have VAT at a reduced rate of 5 per cent, including power utilities, gas boilers, and solar panels. For more information on what VAT rates apply to goods and services, see HMRC’s guidelines.

Not all UK businesses are registered for VAT – it only applies to those whose turnover is above the threshold set by HM Revenue & Customs (HMRC). Once registered, you must charge VAT on the goods and services you provide, but you can reclaim any VAT you’ve had to pay on business purchases and expenses.

Do I need to register for VAT?

If you’ve just set up a business or have a low turnover, you don’t need to worry about VAT. But, as soon as your business turnover reaches the VAT threshold (£85,000 from 1st April, 2017) – or you expect it to do so within the next 30 days – you must register for VAT or risk a fine.

There are a couple of reasons why it’s worth becoming VAT registered before you hit the VAT threshold.

  • Being registered for VAT sends a positive message about your business. A VAT registered business is considered to be more mature as it’s deemed to have a turnover of more than £85,000 and therefore appears a solid company to work with.
  • Your business can reclaim VAT on the purchases it makes. When you buy products and services for your company you’ll be charged VAT. If you’re registered for VAT you can offset the VAT you’ve been charged (known as ‘Output VAT’) against the VAT you’ve collected (known as ‘Input VAT’).

If your turnover is below the threshold, you can voluntarily register. You may choose to do this, if the ability to reclaim VAT paid on purchases helps your business. To register for VAT, contact your local HMRC office or you can complete the relevant online forms.

How do I become VAT registered?

Most businesses register for VAT online but, alternatively, you can use an agent or accountant to register and submit your VAT returns on behalf of your company.

If you can’t register online, you must register by post – especially if you are applying for a registration exception, are based in the EU and distance selling to the UK, or you are importing goods from another EU country.

  1. Visit the HMRC tax registration website to begin the process of registering for VAT.
  2. If you’ve previously registered with HMRC and have a Government Gateway Account, click on ‘I have an account – login’. If you need to create a Government Gateway Account, click ‘Create an account for me’.
  3. Enter your Government Gateway ID and password, then scroll to the bottom of your business account screen and select ‘Find a tax, duty or scheme’.
  4. Click ‘VAT and VAT services, e.g. EC Sales List’ from the choice of options, then click Continue. Choose ‘VAT’ from the next screen, then click ‘Continue’ to continue the registration.

Alternatively you can send in a paper form to register for VAT. Download the form VAT1 form from HMRC, complete it and return it through the post to register for VAT.

For more detail on the registration process, see our guide to Registering for VAT.

What documents do I need to register for VAT?

If you’ve just started your business, or haven’t been trading for a long time, the documents needed for registering for VAT are relatively straightforward. You’ll need the following to register for VAT:

  • A Unique Tax Reference – this is the ten-digit reference number issued to your business when you registered with HMRC for Corporation Tax.
  • Business registration details – company number and registered address. This can be found on your certificate of registration from Companies House.
  • Business bank account details – for payments of VAT you reclaim.
  • Details of any associated businesses from the past two years.
  • If applicable, details of the business if it has been transferred or acquired.

Once submitted, your application for VAT will be processed and then, once registered, you’ll receive a VAT4 – the VAT registration certificate – including the VAT number you’ll need to use on all the invoices and receipts you issue that charge VAT.

How do I pay VAT to HMRC?

Once you have become VAT registered, your business must file a VAT Return with HMRC every three months. However, small or medium-size businesses with turnovers of up to £1.35 million can register for the Cash Accounting Scheme. This lets you calculate VAT on the basis of payments made and received, rather than on basis of invoices issued – this is useful if your business is affected by late customer payments. You can also submit just one annual return and pay the VAT owed monthly by direct debit.

To complete the return, you’ll need details of your business’s total sales and purchases, how much VAT you’ve charged and how much VAT you’ve paid and wish to reclaim.

The VAT you charge your customers is known as output VAT, while VAT you’ve paid on business purchases is called input VAT. The difference between the two is what must be paid to HMRC, usually quarterly.

VAT returns are submitted online and your online account is set up when you register for VAT. HMRC officers may choose to visit your business to check your VAT records. If your VAT returns are found to be incorrect, you may be charged a penalty and interest on the amount owed.

The deadline for submitting the VAT return and paying HMRC are the same – one month and seven days following the end of the three-month accounting period.

How do I charge VAT?

You will need to issue a VAT invoice for the sale of goods or services to a VAT-registered customer. This should include:

  • A unique invoice number
  • The business’ name and address
  • The business’ VAT registration number
  • The invoice date
  • The time of supply (also known as tax point) if this is different from the invoice date
  • The customer’s name and address
  • A description of the goods or services supplied

For each different type of item listed on the invoice, you must show:

  • The unit price or rate, excluding VAT
  • The quantity of goods or the extent of the services
  • The rate of VAT
  • The total amount payable, excluding VAT
  • The rate of any cash discount
  • The total amount of VAT charged

What VAT scheme should I register for?

Before you start the registration process, make sure you choose the right VAT scheme for your business. There are three to consider and each is suitable to a different type of business.

Standard VAT or Accrual VAT Scheme
Most businesses opt for this scheme as it’s straightforward – you simply pay any VAT you’ve collected (‘Input VAT’) and claim back any VAT you paid (‘Output VAT’) on a quarterly basis. However, it can cause cash flow problems for small businesses. For example, if you’ve issued a VAT invoice that has not yet been paid, you’ll still need to pay HMRC the VAT amount you’ve invoiced for in that quarter even if you haven’t received the payment.

Cash accounting
This is often better suited to smaller businesses as it only involves paying HMRC the VAT income you’ve actually received in that quarter. The downside is you can’t claim VAT back on any unpaid invoices you’re yet to settle. Find out more about the VAT Cash Accounting Scheme.

Flat Rate Scheme
You can join the Flat Rate Scheme (FRS) at any time from first registering for VAT. Different industries are given different VAT percentages to pay HMRC and all are lower than the standard 20% VAT rate. For example, pubs have an FRS of just 6.5% while a computer repair business may have an FRS rate of 10.5%. You can only join this scheme if your turnover is less than £150,000 annually. In practice you pay HMRC the flat rate (such as 10.5%) even though you can charge 20% VAT to customers – meaning you pay less VAT to HMRC than you collect. However, the downside is that you can’t claim back the VAT you incur on your purchases apart from some capital expenses in excess of £2,000. Find out more about the VAT Flat Rate Scheme.

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