What is VAT, when do you have to register for VAT, what are the charges? We explain the basics here in the VAT FAQ.
What is VAT?
VAT is Value Added Tax. It is a sales tax charged by VAT registered businesses on the supply of the goods or services supplied to their customers.
Compulsory registration
The law requires UK businesses with turnover above the VAT threshold to register for VAT and charge it on supplies of goods or services. The business charges the VAT and then pays it over to HM Revenue & Customs (HMRC)- in effect, you act as tax collector. This is a mandatory requirement.
Voluntary registration
Businesses whose sales are below the VAT threshold do not need to register for VAT (but can do so voluntarily) so not all businesses are required to be VAT-registered. You may wish to register if you have significant VATable business expenses which you can claim.
What rate is VAT charged at?
The standard rate of VAT is 20%. Certain supplies of goods and/or services may charge VAT at 0% and 5%, but the majority of supplies are at the standard rate of VAT.
Are all supplies liable to VAT?
No, they are not. Some businesses are not registered for VAT because their business has turnover below the VAT registration threshold and so they cannot charge VAT on their sales (unless they decide to register voluntarily ( see above). Some businesses provide exempt services which by their nature, mean then they are unable to register for VAT and therefore unable to claim VAT on business expenses. If you provide services to overseas businesses, then generally the supply is outside the scope of VAT- therefore no vat is charged- but there are some exceptions in this respect.
I have been charged VAT on some of the items I have bought. Can I get it back?
If you are not VAT registered then you will not be able to reclaim any VAT.
If you are a VAT registered company, then you will normally offset the VAT you have been charged by your suppliers on your business expenses against the VAT you have charged your customers. This is the standard rate scheme. This is done each time a VAT return is completed. The net amount of VAT shown on your VAT return must then be paid to HMRC. If you have paid more VAT to your suppliers than you have charged to your customers, you should receive a VAT repayment from HMRC upon submitting your VAT return.
When do I have to start charging VAT to my customers?
You must start charging VAT on sales once you are VAT registered.
When must I register for VAT on a compulsory basis?
When your business income reaches the VAT registration threshold, you must consider whether you are legally obliged to register for VAT (this is compulsory registration).
There are two separate tests for compulsory VAT registration:
- Each month you need to total your sales for the month. You then need to keep a 12 month running total, that is, the total amount for that month and the preceding 11 months of your VAT taxable turnover. For many businesses, the VAT taxable turnover and sales will be the same. When that total reaches the VAT registration threshold (£90,000 for a 12-month period ending in 2024/25), you need to register by the end of the following month.
For example, if your VAT taxable turnover exceeds £90,000 for the twelve months to 31 August 2024, you need to register for VAT by 30 September 2024. Usually you will then be required to charge VAT on your sales from 1 October 2024.
You must remember that you need to register for VAT if your VAT taxable turnover in ANY consecutive 12-month period reaches the registration limit – it is not just the level of VAT taxable turnover in your 12-month accounting period that you need to check.
- If at the start of any 30-day period you believe that your VAT taxable turnover for that 30-day period alone will exceed the VAT registration threshold (£90,000 for 2024/25), you need to register immediately.
Once you are registered for VAT you must then add VAT to your sales invoices at the appropriate rate and complete VAT returns.
How do I register for VAT?
Most businesses can register online for VAT. Otherwise, you need to complete form VAT1. Brookson can assist in this process.
When do I have to make VAT returns to HMRC and pay my VAT?
Most businesses need to complete VAT returns quarterly. They must usually be completed and submitted within one month and 7 days of the end of the relevant period and payment made at the same time. For example, a VAT return for the 3 months to 30 June 2024 must be submitted by 7 August 2024. Subsequent VAT returns will need to be submitted for the 3-month periods to 30 September 2024, 31 December 2024, 31 March 2025 and so on.
There are different types of VAT schemes which you may be eligible to use, and these are explained briefly below and also in the section Different ways to account for VAT on GOV.UK.
Are there any simplified VAT schemes which may suit my business?
Depending on the type of business and your annual turnover, you may be able to choose to use a simplified VAT scheme. Below is a table which includes a brief summary of the main VAT schemes that businesses choose and where you can find further information. There are additional VAT schemes available which are not covered below; these are detailed under Different ways to account for VAT on GOV.UK.
| Cash accounting (this is automatically applied- you do not account for the VAT on turnover until you receive the income from your customer) | Estimated VAT taxable turnover for next 12 months is £1.35 million or less. | VAT is calculated on actual cash receipts and payments rather than based on invoice dates. | See GOV.UK. |
| Flat rate (You must apply for this scheme) | Estimated VAT taxable turnover for next 12 months is £150,000 (excluding VAT) or less. | Pay VAT based on a fixed percentage of your sales, the percentage used depends on the business sector and you may also have to consider the amount of business expenditure incurred on ‘relevant goods’. Do not claim VAT back on purchases except certain capital assets costing over £2,000. | See GOV.UK. |
What happens if I pay my VAT late or submit my VAT return late?
Penalties for non-compliance with the VAT system are extensive. The penalty system is changing and new rules come into effect on 1 January 2023. Details of the new VAT penalty arrangements are disclosed here.
What records do I need to keep for VAT?
Usually you should keep all the information relating to your VAT return, such as business invoices and receipts, for at least six years. Some records must be kept in digital format to comply with the Making Tax Digital rules.
When do I no longer need to be VAT registered?
If your business is VAT registered, then you will need to cancel your VAT registration when you stop trading (unless you have sold your business as a going concern and the new owner has kept the same VAT registration number, but you should take in this situation). You must cancel your VAT registration within 30 days of ceasing to trade or you may be charged a penalty. You can notify HMRC online, or by completing form VAT7 available on GOV.UK. You can also voluntarily cancel your VAT registration if you believe your VAT taxable turnover will be below the deregistration threshold of £88,000 ( from 1st April 2024) in the next 12 months. After cancelling your VAT registration, you need to keep your VAT records for six years.