Tax & admin 28 September 2020

A VAT guide for UK businesses

A guide to VAT for UK businesses
Everything you need to know about how VAT works for UK businesses

Find out what VAT is, how it works, the threshold for when registering for VAT becomes compulsory, and more. 

Click a link to jump straight to the info you’re looking for or read on for the full lowdown on UK VAT:

What is VAT and how does it work?

VAT, or value-added tax, is a “consumption tax” which is added to the cost of pretty much everything you can buy in the UK. If you run a business, you may be required to register for and collect VAT on behalf of the Government.

Businesses charge their customers VAT and pay this to HMRC when they file their VAT return.

What is the threshold?

The VAT threshold is currently £85,000. If your VAT taxable turnover is over £85,000, or you know that it will be, you must register for VAT.

If your business is VAT-registered you must pay and charge VAT on the products and services you sell and buy.

If your business doesn’t have a turnover in excess of the £85,000 threshold, registering for VAT is voluntary; you may choose to register, but it is not compulsory.

VAT is charged on ‘taxable supplies’, such as:

  • Business sales – if you’re selling goods or services
  • Hiring or loaning goods or equipment
  • Commission
  • Selling business assets
  • Products you sell to staff – eg. meals at a staff canteen

What are the VAT rates in the UK?

  • 20% is the standard rate charged on most goods and services.
  • 5% is the reduced rate and is applied to some energy and health services, sanitary products and protective products, such as child car seats.
  • 0% or zero-rated VAT is applied to basic foods, books, newspapers and children’s clothes. Even though no VAT is charged, the sale of zero rate goods and services has to be recorded and reported on your VAT return.

What items are exempt?

Items which are exempt, but still need to be listed on your return, include:

  • Postage stamps
  • Insurance, investment and financial services
  • Sports and physical education activities
  • Betting and gaming
  • Bingo
  • Lottery tickets
  • Admission to certain cultural events, such as museums, art
  • exhibitions and performances
  • Antiques
  • Professional care or medical treatment
  • Education provided by an eligible body

The government website has a complete list of VAT rates on different goods and services.

What is the Flat Rate VAT Scheme?

If your VAT taxable turnover excluding VAT is less than £150k, you can apply to HMRC to use the Flat Rate VAT Scheme. Designed to help small businesses reduce the amount of time spent on accounting, the Flat Rate Scheme means you can pay a percentage of your turnover as VAT.

The range of flat rate percentages changes according to business sector. The full breakdown of flat rate percentages can be found on the government website.

An accountant or bookkeeper will advise you if this makes sense for your business.

How do you register for VAT?

When you register for VAT, you’ll need to have the following information to hand:

  • Your National Insurance (NI) number or ‘tax identifier’
  • Certificate of incorporation/incorporation details
  • Details of associated businesses over the last two years
  • Details of your business bank account
  • Transfer details if the business has been acquired

You can register online or on paper via a form which you can mail to HMRC.

Online registration

It doesn’t cost anything to register for VAT and it’s easy to do on your own. You can register online with the HMRC. First you need to register for HMRC online services or the Government Gateway.

Register for VAT online.

Paper registration

You may need to register using form VAT1, situations when you may need to use this form include:

  • If you’re applying for a ‘registration exception’
  • If you’re registering several different VAT numbers for separate businesses or divisions of a business
  • If you’re joining the Agricultural Flat Rate Scheme

Download the VAT1 form.

Register for VAT Online Services

Whether you apply for VAT online or on paper, newly-registered businesses must submit their returns and make any VAT payments online.

When you have received your VAT4, or certificate of registration, you must register for VAT Online Services with HMRC. To do this, you’ll need to provide the following information about your business:

  1. VAT registration number
  2. Postcode of your main place of business
  3. The date you registered for VAT
  4. The final month of the last VAT return you submitted (N/A if you’re newly VAT-registered)
  5. The figure from ‘Box 5′ on the last VAT return you submitted (input zero if you’re newly VAT-registered)

Once registered, you will need to add VAT to your prices, issue invoices to customers, file returns and pay any VAT due to HMRC and, finally, maintain digital VAT records and a VAT account.

How is VAT calculated?

To add VAT to your invoices, there’s a simple calculation formula:

  • For 5% VAT – Cost of item x 1.05
  • For 20% VAT – Cost of item x 1.2

If you prefer to use a calculator to make sure you’re getting it right, there are online calculators specifically designed to help. Here are three you could use to calculate your VAT: kashflow.com, vatcalconline.com and smallbusinesspro.co.uk.

VAT invoices

When you are VAT-registered your invoices must include:

  • An invoice number
  • Date invoice is issued
  • The date the goods and services were supplied, different to the invoice date
  • Name and address of your business
  • Your VAT registration number
  • Customer name and address
  • Description of the goods and services covered

Your VAT invoice should also include:

  • The unit price excluding VAT
  • Quantity of items sold
  • VAT rate
  • Sum owed excluding VAT
  • Amount of VAT to pay
  • Any cash discount applied

How do you submit a VAT return?

VAT-registered businesses are generally required to submit VAT returns every three months. When your VAT is due will depend on when you registered and which accounting scheme you use. You can find specific dates from HMRC in your VAT online account.

The following steps explain how to file your return and pay your bill, or get your refund:

Step 1. Have the necessary information to hand

To file your return you’ll need:

  • A record of total sales and VAT collected
  • A record of total purchases and VAT paid

Although you won’t be asked to submit tax invoices when filing your return, you will need them to hand and HMRC may ask to see them at a later date.

Step 2. Submit your VAT

There are two ways to submit your VAT:

  1. Use accounting software – business above the VAT threshold must submit VAT using software which is compliant with Making Tax Digital. Learn more about Software for Making Tax Digital.
  2. Use your VAT online account – if you have voluntarily registered for VAT, you can submit your VAT return digitally through your VAT online account.

Step 3. Pay your VAT

If you have VAT to pay, you usually get one month and a week to pay. You can settle the payment using internet banking, debit or credit card. Many businesses find it easiest to set up a direct debit, allowing HMRC to withdraw the amount you owe directly from your bank account on the date payment is due. Since missing your deadline could mean you’ll be charged a penalty, a direct debit can avoid unnecessary additional fees.

Step 4. Get a refund

If you have paid more VAT than you collected, HMRC will pay you a refund. Make sure HMRC have your bank details, and you should expect refunds to arrive directly into your account within 10 days of the date you submit your return.

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