Value Added Tax (VAT) is an essential source of revenue for the government, and yet, many small businesses are unsure of how it works and whether it applies to them.

But while VAT can be complex, it’s not impossible to understand – and having a grasp of VAT will help you manage your tax obligations so you can focus on growing your business. This guide will give you the basics so you understand your obligations.

What is VAT?

VAT is a UK-wide tax added to the value of goods and services sold in the UK. The business that collects the VAT must then pass on the tax to HMRC via quarterly VAT returns. In that sense, VAT-registered businesses almost act like tax collectors on behalf of HMRC.

Not every business in Scotland has to worry about VAT: businesses with a turnover of £90,000 or above must register for the tax. This is called the VAT threshold. Registering for VAT is relatively simple – you only need to complete your registration online.

There are different rates of VAT, applied on different goods and services. These are:

  • Standard rate (20%): This is the default rate for transactions, covering a wide range of goods and services that are not considered essential. Examples include electronics, clothing (excluding children’s clothing), and professional services.
  • Reduced rate (5%): The reduced rate applies to goods and services that are beneficial but not necessarily essential, such as home energy and children’s car seats.
  • Zero rate (0%): Other goods and services are not taxed at all either because they are essential, like food, or highly beneficial to society, like books and newspapers.

Certain goods and services are exempt from VAT entirely. The difference between an exempt and zero-rated good or service is that the zero-rated one should still be included on your VAT return.

Reclaiming VAT

Adding an added tax charge to your goods and services is only half of the story of VAT: registered businesses can also reclaim the VAT they pay for goods and services purchased for business purposes.

Businesses commonly reclaim VAT on:

  • Goods and services for business use: Office supplies, equipment, raw materials, and services directly related to the business operations.
  • Capital expenditure: VAT on assets like machinery, vehicles, and buildings used for business.
  • Travel and subsistence: VAT on travel expenses (excluding private use), hotel accommodation, and meals incurred during business activities.
  • Fuel and mileage: VAT on fuel used for business purposes, though there are specific rules for reclaiming VAT on mileage for company cars.

It’s essential to reclaim VAT so you pay only the tax you need to—and not a penny more.

VAT returns

A VAT return is a form you file with HMRC, usually four times a year, to show how much you owe them. It shows the amount of VAT due on sales minus the amount of VAT reclaimable on purchases. The result is the amount you owe to HMRC.

If the amount reclaimable on purchases is more than the amount due on sales, HMRC will refund the difference.

In the past, you could file your VAT returns on paper. Nowadays, though, you must follow the Making Tax Digital rules, which require businesses to file returns digitally.

Talk with a VAT specialist

In this guide, we’ve provided you with an overview of VAT, including tax rates, registration, and returns. However, there’s more to VAT that we haven’t had time to cover, such as VAT schemes and the benefits of registering early.

If you would like to learn more about VAT or need help managing your duties, contact us—we would be happy to help.