VAT can be very complex with its constantly moving “goalposts”. Mistakes in calculating VAT can be costly and the rigid system of penalties and interest charges for errors and late submissions stressful.

So what is VAT, does it affect you and if it does, how do you register for it?

VAT is short for Value Added Tax, and is charged on most sales of goods and services in the UK.

If your annual taxable sales are above £85,000 per year - or they are set to pass that limit in the next 30 days - then you must register for VAT (this is called compulsory registration).

In some cases you may wish to register before you reach the threshold. This is called voluntary registration and it can help your cashflow, because being registered for VAT allows your business to claim back VAT on its costs. Before you decide to register for VAT voluntarily it is worth taking the time to think about your existing customers. If your customers are members of the general public or small businesses who aren’t registered for VAT themselves, your charge to them will increase by 20% as they will be unable to claim the VAT back. This could mean that some customers will look elsewhere for cheaper alternatives.

How to register for VAT in the UK

Most businesses can register online via the HMRC website. By doing this you’ll register for VAT and create a VAT online account (sometimes known as a ‘Government Gateway account’) at the same time. You need this to submit your VAT Returns to HM Revenue and Customs (HMRC).

Using an agent

You can also appoint an accountant (or agent) to submit your VAT Returns and deal with HMRC on your behalf.

Managing a transition period

When you apply to be registered for VAT as from a certain date, there will usually be an interim period between that date and the arrival of your certificate and VAT registration number. You’ll have to charge output VAT on any sales after your registration date but until your VAT registration number arrives, you won’t be able to issue official VAT invoices. In the interim period you’ll need to add the relevant rate of VAT, usually 20% to the total value of all your invoices as from the date from which you’ve applied to be registered. You cannot charge or show VAT on your invoices until you get your VAT number. However, you’ll still have to pay the VAT to HMRC for this period.

You should increase your prices to allow for this and tell your customers why. Once you’ve got your VAT number you can then reissue the invoices showing the VAT. This is so that your customers have official VAT invoices and can reclaim input VAT on the goods or services they’ve bought from you if they are VAT registered themselves.

Now you are registered - what next?

Once your business is registered for VAT, then it has to charge VAT on all the taxable sales it makes to its customers. The VAT you charge to your customers is called “output VAT” and is charged on things like;

business sales - for example when you sell goods and services

hiring or loaning goods to someone

selling business assets

commission

items sold to staff - for example canteen meals

business goods used for personal reasons

‘non-sales’ like bartering, part-exchange and gifts

Your business will also be able to reclaim the VAT that its suppliers charge. Bear in mind that there are some supplies on which you won’t be able to reclaim VAT, such as entertaining anyone other than staff. VAT that can be reclaimed is called “input VAT”.

VAT rates

There are 3 different rates of VAT and you must make sure you charge the right amount.

Standard rate

Most goods and services are standard rate. You should charge this rate unless the goods or services are classed as reduced or zero-rated.

Reduced rate

When you charge this rate can depend on what the item is as well as the circumstances of the sale, for example:

children’s car seats and domestic fuel or power are always charged at 5%

mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home

Zero rate

Zero-rated means that the goods are still VAT-taxable but the rate of VAT you must charge your customers is 0%. You still have to record them in your VAT accounts and report them on your VAT Return. Examples include:

books and newspapers

children’s clothes and shoes

motorcycle helmets

Rates can change and you must apply any changes to the rates from the date they change.

VAT return

VAT-registered businesses must report to HM Revenue and Customs (HMRC) the amount of VAT they have charged and the amount of VAT they have paid. This is done through your VAT Return which is usually due every 3 months.

If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

Useful tip that might work for you if you are usually paying HMRC

Set up a separate VAT account to keep your VAT monies separate so you don’t spend it! It can be very easy to forget that the sales invoices you are being paid for now include money that is not yours as the VAT belongs to HMRC. If your business does not have many expenses for which it can reclaim VAT, for example a contractor providing consultancy services, the chances are you will usually be paying HMRC. If you get into the habit of transferring the 20% VAT from you main business account to another account when the invoice is paid this will ensure you will always have the monies available to pay to HMRC.

MTD (making tax digital)

Most VAT registered businesses that earn over £85,000 must also follow the rules for ‘Making Tax Digital for VAT’ which means you must keep digital records and use HMRC compatible software to file your returns.

Should I hire an accountant

VAT is often a complex area for a small business and it is very easy to make inadvertent mistakes; it is always advisable to have an accountant on board as their knowledge and experience can save you a great deal of time and ensure you file VAT returns that are correct and before the due date.