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 doesnt 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, youll 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 doesnt 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, youll 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

 
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