This fact sheet explains some basic rules about VAT and some of the more common complications.  

Please be aware that this is just an outline of the basics and I cannot accept any responsibility for any loss you may incur relying on just this factsheet without having consulted me in person. If you need my help with anything below, please get in touch using the contact form.

VAT stands for Value Added Tax and is a tax on the supply of goods and services.  It is charged at varying rates depending upon what is being supplied.  

VAT registered businesses can recover the VAT they incur on their purchases (input VAT), but they must charge VAT on their sales (output VAT).  The difference between what they have charged and what they have incurred is paid to HMRC each time a VAT return is done.  If a business incurs more VAT than it charges on sales in a VAT quarter, then HMRC will repay the balance to the business.

This means that a business selling only stand rated goods and services does not “suffer” any VAT, it just acts as a collecting agent for HMRC.  

Goods and services must generally be supplied in the UK (but there are detailed rules for some businesses).  Also, the supply needs to have been made in the course of business by a “taxable person” (which can be a human, a partnership, a charity or a company).  

The VAT rates are currently 20% - standard rate, 5% - reduced rate and 0% - zero rate.  

Some things are exempt from VAT, like most rent, public postal services, and insurance.  Also, some things are “outside the scope of VAT”, like taxes, salary payments and sales to outside the EU.

Lots more things that are exempt or outside the scope of VAT, these are just some examples. 

The distinctions matter because they affect whether a business can register for VAT and how much input VAT they claim.

Basic calculations 

For most VAT registered businesses selling standard rated supplies 20% VAT is added to sales invoices.  For example, if a business sold its time doing digital marketing for £1,000 it would have to add VAT of £200 giving a total of £1,200.

If it agrees to sell goods at a certain price including VAT, say £600 it must divide by 6 to work out how much VAT has been included in the sale, £100 in this case.

When must you register for VAT?

HMRC is responsible for collecting VAT and you must register with them if your turnover is over the registration threshold.  Details of current VAT registration thresholds can be found at https://www.gov.uk/vat-registration/when-to-register.  

To work out if you or your company needs to register for VAT you  look at the value of your taxable sales over the last 12 months.  You need to do this each month as you approach the VAT registration threshold to make sure that you do not miss your registration deadline and incur penalties.  

If you go over the threshold in a month you have 30 days after the end of that month to register.  If you exceed the VAT threshold during July, you must register by the 30th August and your registration will start from 1 September.

You must also register if you expect to exceed the VAT registration threshold in the next 30 days alone – So if you make a big break and win a large contract you must check the rules and seek advice as soon as you know the contract is going ahead.

When can you register for VAT?

You don’t have to be over the VAT threshold to register for VAT, if you are trading or intending to trade you can register voluntarily.  

This can be advantageous if you are selling zero rated items, such as cakes or children’s clothes.  You will have no output VAT but will be able to claim input VAT.  

If you are just setting up and are spending a lot of money on say a van and computer equipment you will be able to claim the input VAT back at the outset which will help cash flow.  

In this situation you need to weigh up the financial benefit of claiming the input VAT against the extra administration involved.

Other things to know

If you are an individual running several businesses, then you are a taxable person.  This means that you need to add all your taxable turnover up for all your businesses in order to work out if you have reached the registration threshold.  Likewise, a company is a taxable person, so if it has multiple business lines then these must all be added together.

Planning for VAT registration

A very important thing to plan for is the impact on profits if you cannot put your prices up once you are registered for VAT.  This is often the case if all your customers are the genal public or businesses that are not registered for VAT.  

Consider a sale of £600, before the business is VAT registered the turnover is £600.  Once it is VAT registered, it will still sell for £600 but £100 will have to go to HMRC, leaving turnover of £500.  It won’t be quite as bad as this because input VAT can now be reclaimed, but the effect will still be felt.

Administration

Once registered businesses usually make quarterly VAT returns to HMRC.  A business can choose its VAT quarters at the time of registration, or you can change them once registered, usually to tie in with the accounting year end.  The returns are filed online with the normal deadline being one month and 7 days after the quarter end.  

Payment must be electronic and has the same basic deadline, but if you set up a direct debit it will be taken 3 days later.

There are other options available depending upon the size and nature of your business, if you reclaim VAT regularly the you can do monthly returns.  There is also an annual accounting scheme.

Making Tax Digital and record keeping

VAT must now be filed under “Making Tax Digital”, meaning record keeping must be digital (a spreadsheet is OK) and the transfer of information from the digital records to HMRC must happen electronically.

It is therefore now important to comply with these digital rules and I am always happy to advise on how this can be done in a cost effective and efficient way.  Records must detail of all sales, purchases and expenses.  I have a separate factsheet on business records.

HMRC Inspections, Offences and Penalties

HMRC may occasionally inspect VAT records to check that they are being kept correctly and VAT returns are correctly prepared as a result.  

HMRC also have the powers to assess penalties for late registration, late returns and/or payments and errors.  The size of penalties will depend upon the amount of lost tax and whether the error was due to carelessness or was deliberate.  The degree of taxpayer co-operation in resolving any issues will also be considered.  As usual HMRC do not regard ignorance as a reasonable excuse, and it can be comforting having a professional helping you should HMRC discover an error.  

How something simple gets more complicated

As if it wasn’t complicated enough here are some of the more common areas where additional VAT rules apply causing potential problems for business.

Not all VAT is recoverable

Generally, a business can recover input VAT on its purchases.

However, the VAT on some invoices is “blocked” by the legislation, meaning you cannot reclaim it.  The most common examples are:  VAT on expenses incurred entertaining your clients/customers.  This cannot be reclaimed at all.  The other common example is VAT on lease payments for cars where there is any element of private use.  In this instance only half of the VAT can be reclaimed.

Partial exemption

Things can become complicated if your business both taxed and exempt items.  Examples include;

• a residential property rental business that buys land and constructs a house, 
• a medical doctor doing healthcare work for say private hospitals and writing medical reports for solicitors, 
• a pharmacy that also sells things like makeup, soap, shampoo etc. 

There are many others, so it is always worth stopping to think about your business every now and then.  It is easy to respond to your market to meet a demand, or take advantage of an opportunity, and later find you are not following the VAT rules.

It is always best to seek advice before entering into transactions as they often cannot be undone.

When VAT-able items are sold alongside exempt items some rules known as the partial exemption rules apply.  If you ran a business with just exempt sales, then you would not be able to register for VAT and therefore could not reclaim any input VAT.  

So, to make things fair when your business activities are a mix of taxable and exempt sales then the partial exemption rules aim to allow some of the input VAT to be allocated to each part of the business which restricts the amount of input VAT you can claim.

It is always worth seeking advice if your business is in this position in order to maximise the amount of input VAT you can claim.

Place of supply 

VAT is a tax on goods and services supplied in the UK, another straightforward basic rule.  

However, there are various rules that apply where goods and services are attached to transport, land, digital services and other areas.  Transactions can also have different rules applying to them if they are supplies between businesses or between your business and a consumer and one or another is outside the UK.  These all need to be considered carefully to ensure that VAT is correctly calculated and paid and to ensure that there is no obligation to register in a different country.

Digital Supplies

If you sell any digital supplies to the EU, whether your level of business is over the VAT threshold or not , you will need to be registered with a Non Union Mini One Stop Shop.  It is easiest to register in Ireland as everything is in English.  There are all sorts of rules around this so if you think it applies to you please seek advice.

Other Schemes

There are various VAT schemes available that can simplify record keeping and sometimes save VAT.  On a basic level you have the choice of working out your VAT on a cash basis, that is when you receive and pay money, or on an invoice basis, that is based on the dates on your sales invoices and supplier invoices.  The nature of your business will determine which is best.

A commonly used scheme is the Flat Rate Scheme which simplifies the calculation of VAT, although it often confuses!  This scheme can save some businesses money, so it is worth taking advice.

How I can help

I am afraid I may well have confused some of you with all of this.  Unfortunately, although VAT is based around some nice simple basic concepts and rules there are so many areas where detailed rules exist that this simplicity can disappear.

It is relatively easy however, to understand the rules that apply to your own business and I am always happy to help anyone do this.  I am also happy to discuss any changes to your business that you are planning and how the VAT rules may affect them.

My VAT services range from a basic review as part of annual accounts preparation, through review of quarterly VAT returns to a full bookkeeping and VAT return preparation process.  

If you think I could help you, please do not hesitate to contact me for your free consultation.