Understanding VAT

Read time: 5 mins Date added: 15/08/2024

Learning about the ins and outs of VAT is unlikely to be high on your to-do list when you start your own business. However, it pays to have a good grasp of the basics to help make informed decisions when the time is right. 

There’s more to VAT than meets the eye, and in this guide, we’ll take you through the various considerations step-by-step. Even if you have an accountant in place, it’s still vital to have some knowledge of how VAT works. You’ll also grasp how being VAT registered could benefit your business either now or at some stage in the future. 

On this page:​

On this page:​

What is VAT?

VAT is a tax added to most products and services sold by VAT-registered businesses.1

VAT is also charged on the following:
 

  • Commission
  • Hiring out or loaning goods
  • The sale of business assets.
     

Several things are considered ‘out-of-scope’ when it comes to VAT and shouldn’t have it added; these include:
 

  • Buildings, land and property
  • Education and training
  • Garages and parking spaces.
     

The government sets the standard rate of VAT. They also decide which products and services require the standard rate to be charged and which come under the other categories of ‘reduced rate’ and ‘zero rate’.

VAT came into effect in the UK in 19732 and is payable at each stage of the supply chain. It’s levied at the manufacturing process and right through to the final sale to your customers.

How does it work?

If your business is VAT registered (more on that in the next section), it will need to charge VAT on the eligible goods and services supplied. Once collected, your business is legally obliged to pay the right amount to His Majesty’s Revenue & Customs (HMRC).

It’s not all a one-way street, though. Your business can also claim back any VAT paid on any qualifying expenses. You might even be able to reclaim VAT from certain purchases made in your business before your registration date, but your accountant will be able to advise.

Not every business needs to register for VAT. Here’s a brief overview to give you more detail.
 

Compulsory VAT registration

VAT eligibility is based on business turnover. If yours exceeds £90,000 on a rolling 12-month basis, you’ll be expected to register your business for VAT by the next calendar month after you’ve reached the threshold.
 

Voluntary VAT registration

Depending on your business finances and circumstances, it may be beneficial for you to register for VAT voluntarily before you reach the compulsory threshold. We’ll look at the benefits in more detail below, but one of the main advantages is that in some industry sectors, many businesses prefer to work only with VAT-registered suppliers. 

If your business is nearing the £90,000 turnover threshold, you’ll want to read the next section on the VAT registration process.

How do I register for VAT?

Whether you’re registering your business for VAT because you’re required to or voluntarily based on professional advice, there are a few things you need to know.

Firstly, there are three main VAT registration scheme types.
 

  • The Flat Rate Scheme – will apply if your business turns over less than £150,000. The main things to note are that you’ll be required to pay HMRC a percentage of your turnover based on your industry, and you won’t be able to claim back VAT on business purchases.
  • Cash Accounting Scheme – to be eligible for this scheme, your turnover must be lower than £1.35m. Many small businesses use this to make quarterly payments to HMRC based on the VAT income received each quarter.
  • Annual Accounting Scheme – as the name suggests, rather than making quarterly VAT payments to HMRC, this scheme allows you to make advance payments as the year progresses. The advantage is that you only file one VAT return and then pay any excess you’re due or reclaim any overpayments on your account. The Annual Accounting Scheme is also only for businesses with a turnover lower than £1.35m.
     

What do I need in order to register for VAT?

VAT registration can be done online via gov.uk or the VAT1 paper form. The information required varies slightly depending on your business type3. 

 

Registering a limited company

You’ll need to have the following details to hand: 
 

  • Annual turnover, self-assessment and corporation tax figures
  • Bank account details
  • Company registration number
  • Pay As You Earn (PAYE) information 
  • Unique Taxpayer Reference (UTR).
     

Registering as an individual or partnership

If this applies to you, you’ll need:
 

  • Annual turnover figures
  • Bank account details
  • Driving licence or passport for ID purposes
  • National Insurance Number
  • Self-assessment return
  • Unique Taxpayer Reference (UTR)
  • Your payslips and P60.
     

Once registered, you’ll receive your VAT registration certificate (VAT4) with your registration date, number, first return submission, and payment dates. 

You’ll need to add your VAT registration number to invoices and receipts for goods and services where VAT needs to be paid.

How do I submit a VAT return?

Since April 2022, VAT returns have had to be submitted through the government’s Making Tax Digital initiative4.  To do this, you need to ensure your accounting software is compatible with the HMRC system. 

Signing up to Making Tax Digital is simple, and our Business Finance Assistant accounting software makes it easy to send your VAT returns securely online. 

But that’s not all it can help you with, it can also:
 

  • Give your accountant access to your invoices, profit & loss and cash flow position
  • Provide greater clarity on your finances so you can plan accordingly
  • Connect unlimited business bank accounts.
    •  

Using Business Finance Assistant regularly will also help you or your accountant see what your self-assessment tax return or corporation tax bill is likely to be at your financial year-end. This insight will ensure no surprises, and you can budget confidently.

What are the benefits of being VAT registered?

While registering for VAT is compulsory for many businesses, it can still deliver several benefits. Some of these also apply to business owners looking to register voluntarily. Here are some of the main advantages: 

  • A boost in brand perception – being VAT registered can give your business more credibility, change how others view you and lead to new opportunities. As mentioned earlier, many larger organisations will only work with VAT-registered businesses. 
  • Cost-effectiveness – your business may be able to reclaim the VAT paid on legitimate expenses, which could leave you better off overall, depending on your circumstances.
  • Financial clarity – being VAT registered means ensuring your finances are always accurate and up-to-date. This efficiency can positively impact things like cash flow and financial forecasting. 
  • Improved cash flow – the UK government’s Cash Accounting Scheme allows your business to pay VAT only on your eligible quarterly turnover. This can improve the amount of cash in your business instead of paying based on an annual estimate and reclaiming any excess later. 

1How VAT works – GOV.UK

2Value added tax (VAT) at 50 – UK Parliament

3Register for VAT – GOV.UK

4Register for MTD-ICEW

Free accounting software

Free accounting software

Connect Business Finance Assistant to your business accounts to predict cash flow, submit digital VAT returns and much more.

Business Finance Assistant

Business Guides

Business Guides

Practical guides to support you in developing your business - from starting-up and managing it day to day, to growing and trading internationally.

View business guides go to page