VAT can be confusing at first, but the basics are quite simple once you get the hang of it.

Here’s our guide to the current VAT rules and what they mean for your business.

What is VAT?

VAT stands for Value Added Tax. It is a sales tax charged on a wide range of goods and services sold in the UK.

Unlike other taxes, VAT is charged at the point of purchase. This means companies pay VAT on business purchases and then claim this money back from HMRC.

You may also be required to charge VAT on items or services you sell and then pass this money on to HMRC.

How much is VAT?

The majority of VAT is charged at a flat rate of 20%. However, there are a few exceptions. Some items are taxed at a lower rate of 5%. These include children’s car seats and mobility aids for the elderly.

There’s also a 0% VAT rate charged on children’s clothes, books and most basic foodstuffs. This is not the same as a VAT exemption, which applies to certain goods and services, including lottery tickets, antiques and educational training programmes.

Do I have to register for VAT?

It’s compulsory to register for VAT if your sales of VAT-eligible goods have exceeded £85,000 in the last 12 months. You have 30 days to register online from the end of the month in which you passed this threshold. Otherwise, you could be charged a penalty of up to 15% on your first VAT bill.

If your annual turnover is less than £85,000, you don’t have to register for VAT. However, it may still be worth your while to do so.

Registering for VAT means you can reclaim on business purchases, potentially saving you a lot of money. On the other hand, it will also mean raising your prices by 20%. This could cause you to lose customers if they’re not able to reclaim the VAT themselves, so you’ll need to weigh up your options carefully.

Registering for VAT is relatively straightforward, but there are various scheme options to choose from. Each comes with its own pros and cons, and some have extra eligibility criteria.

We can help you work out what is best for you. You can apply via the GOV.UK website, and you will receive a nine-digit VAT reference number. You can use this to submit VAT returns and make VAT payments to HMRC.

How do I submit my VAT return?

Since 2019, all VAT-registered businesses have been required to keep digital records and submit a digital tax return using compatible accounting software, under HMRC’s Making Tax Digital (MTD) programme.

You have probably heard of some of the main MTD-approved software packages from providers like Xero and QuickBooks.

As of 1 November 2022, the original HMRC VAT portal will be closed, except for people who are MTD-exempt or file their returns annually. This means anyone who hasn’t made the switch to MTD will be automatically migrated.

Failing to register and connect cloud-based accounting software to HMRC could result in a penalty.

MTD will be extended to other areas of taxation in the coming years, so now is the perfect time to get to grips with the software on offer. There are lots of packages to choose from, so it’s a good idea to test a few and see which is the best fit.

A helping hand with VAT

If you’d rather not manage your VAT returns yourself, you can hire an accountant to calculate and submit your VAT return for you.

We’ve helped businesses of all kinds with their VAT returns, and we’re always happy to lend a hand in this area.

If you have any questions about VAT, MTD, or anything else related to your company’s finances, don’t hesitate to get in touch.