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.
Registering your business for Value Added Tax and then ensuring you comply with the rules for charging and paying VAT can be complicated. It’s important to register for the correct VAT scheme, know when and how to charge VAT, and what you must submit to HM Revenue & Customs (HMRC). Failing to get VAT right can result in hefty penalties.
What is VAT?
VAT is a tax that is added to the price of goods and services which a business’s customers pay at the time of purchase or invoice. The business then pays the VAT on to HMRC – effectively operating as a tax collector for HMRC. 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.
Your business pays HMRC the VAT revenue it has collected every three months – known as the VAT accounting period. You must submit a VAT Return even if you’ve no VAT to pay or reclaim.
The standard rate of VAT doesn’t apply to all goods and services. Some goods such as books, children’s clothing and dental services are exempt from VAT. Other goods and services, such as solar panels and gas boilers, attract a lower rate of VAT. For more information on what VAT rates apply to goods and services, see HMRC’s VAT guidelines.
Not all UK businesses are registered for VAT – only 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?
As soon as your company’s annual turnover reaches the VAT threshold – currently £85,000 (April 2017) – you’re legally obliged to register for VAT. However, a company with a lower annual turnover can register for VAT voluntarily. There are a couple of reasons why it’s worth registering for VAT 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’).
How to become VAT registered
Whether you’ve decided to voluntarily sign up for VAT or your turnover has reached the VAT threshold, you’ll need to register for VAT with HMRC. Most businesses register for VAT online. 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 applying for a registration exception, are based in the EU and distance selling to the UK, or importing goods from another EU country.
- Visit the HMRC tax registration website to begin the process of registering for VAT.
- 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.’
- 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.’
- Click ‘VAT and VAT services, eg 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 from HMRC, complete it and return it through the post to register 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 to 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. 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.
What VAT scheme to register for
Before you start the registration process, make sure you choose the right VAT scheme for your business. There are three VAT schemes to consider and each is suitable to a different type of business.
- Standard VAT or Accrual VAT Scheme – most businesses opt for this scheme. 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 VAT payment.
- Cash accounting – better suited to smaller businesses this means you only pay 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’ve 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.
How do I charge VAT?
Once registered for VAT you must legally charge VAT on all products and services you sell. Make sure you know the correct VAT rate to charge by reviewing the VAT rates at HRMC.
You’ll also need to show how much VAT has been collected on the invoice or receipt and the VAT rate that applies. Your VAT information must be displayed on the invoice, including the VAT number, the business’ name and address, a unique invoice or receipt number, the invoice date and a description of the goods or services.
How do I pay VAT to HMRC?
You must submit a VAT return to HMRC every three months which should list your total sales and purchases, the amount of VAT you owe HRMC and the amount of VAT you’re claiming back. A VAT return must be filed even if you’ve no VAT to pay or claim back. Log into HMRC to send a VAT return. You’ll need your VAT number and Government Gateway Account to file the VAT return online.
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. HMRC has produced a video to help you file and submit you VAT return online:
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