Find out what VAT is, how it works, the threshold for when registering for VAT becomes compulsory, and more.
VAT, or value-added tax, is a “consumption tax” which is added to the cost of pretty much everything you can buy in the UK. If you run a business, you may be required to register for and collect VAT on behalf of the Government.
Businesses charge their customers VAT and pay this to HMRC when they file their VAT return.
What is the threshold?
The VAT threshold is currently £85,000. If your VAT taxable turnover is over £85,000, or you know that it will be, you must register for VAT.
If your business is VAT-registered you must pay and charge VAT on the products and services you sell and buy.
If your business doesn’t have a turnover in excess of the £85,000 threshold, registering for VAT is voluntary; you may choose to register, but it is not compulsory.
VAT is charged on ‘taxable supplies’, such as, Business sales – if you’re selling goods or services, Hiring or loaning good or equipment, Commission, Selling business assets, Products you sell to staff – eg. meals at a staff canteen
What are the VAT rates in the UK?
20% is the standard rate charged on most goods and services.
5% is the reduced rate and is applied to some energy and health services, sanitary products and protective products, such as child car seats.
0% or zero-rated VAT is applied to basic foods, books, newspapers and children’s clothes. Even though no VAT is charged, the sale of zero rate goods and services has to be recorded and reported on your VAT return.
The range of flat rate percentages changes according to business sector. The full breakdown of flat rate percentages can be found on the government website.
How do you submit a VAT return?
VAT-registered businesses are generally required to submit VAT returns every three months. When your VAT is due will depend on when you registered and which accounting scheme you use. You can find specific dates from HMRC in your VAT online account.
The following steps explain how to file your return and pay your bill, or get your refund:
Step 1. Have the necessary information to hand
A record of total sales and VAT collected, a record of total purchases and VAT paid. Although you won’t be asked to submit tax invoices when filing your return, you will need them to hand and HMRC may ask to see them at a later date.
Step 2. Submit your VAT
There are two ways to submit your VAT:
Use accounting software – business above the VAT threshold must submit VAT using software which is compliant with Making Tax Digital. Learn more about Software for Making Tax Digital.
Use your VAT online account – if you have voluntarily registered for VAT, you can submit your VAT return digitally through your VAT online account.
Step 3. Pay your VAT
If you have VAT to pay, you usually get one month and a week to pay. You can settle the payment using internet banking, debit or credit card. Many businesses find it easiest to set up a direct debit, allowing HMRC to withdraw the amount you owe directly from your bank account on the date payment is due. Since missing your deadline could mean you’ll be charged a penalty, a direct debit can avoid unnecessary additional fees.
Step 4. Get a refund
If you have paid more VAT than you collected, HMRC will pay you a refund. Make sure HMRC have your bank details, and you should expect refunds to arrive directly into your account within 10 days of the date you submit your return.