An Overview of UK VAT for Small Business Owners

I’ve updated this post on 1 October 2020 for changes in the latest legislation

When you run a business, VAT (Value Added Tax) is one of the most important taxes that you need to be aware of. Whether you need to be registered for VAT or not.

I put together this overview to help you understand VAT and the implications for your small business. The information in this guide will help you stay on the right side of the rules and make some smart choices when it comes to registering.

What is VAT?

Value Added Tax (known as ‘VAT’) is a tax added to the price most goods and services consumers buy. The UK Government uses businesses with a turnover of more than £85,000 to collect this on their behalf. VAT is not a tax that VAT registered businesses (those with a turnover of more than £85,000) pays, the businesses act as collectors of the tax.

Once VAT registered, a business must charge VAT to its customers and pay this over to HMRC after deducting any VAT they have paid to their suppliers.

Different UK Business Structures

The rules are the same for business regardless of their business structure. So whether you are a Limited Company, self-employed or in a partnership you’ll be subject to the same HMRC registration, VAT thresholds and rules.

When Should You Register Your Business for VAT?

You’ll need to register for VAT once the taxable turnover of your business reaches £85,000. That’s why your VAT registration represents a major milestone in your business.

What is Taxable Turnover?

Taxable turnover means the value of sales that would be relevant for charging the standard rate of VAT (20%), excluding any sales that would be exempt from VAT (such as insurance or some financial services).

It is your responsibility to monitor your turnover and register for VAT if required. HMRC does not automatically register you. You’ll need to continually review your turnover on a rolling basis and register for VAT once you know it will exceed the VAT registration limit in the next 30 days.

Failing to register for VAT can result in hefty HMRC penalties, so make sure you have a bookkeeping system in place that you update regularly that helps you monitor your turnover.

How to Register for VAT Online

VAT Registration Limits

Here is a summary of all the current VAT registration and deregistration limits in the UK:

VAT Registration£85,000£85,000
VAT Deregistration£83,000£83,000
Cash and annual accounting scheme
turnover limit
Cash or annual accounting deregistration
turnover limit
£1.6m £1.6m
Flat rate schemes turnover limit£150,000£150,000
Flat rate schemes deregistration turnover limit £230,000£230,000
VAT MOSS£8,818£8,818

VAT Registration Thresholds & Limits

VAT Rates

Once you are registered for VAT, there are different VAT rates that you need to apply when you invoice your customers depending on what you are supplying them.

Equally, depending on what you buy in your business, you may pay different rates of VAT.

Here is a summary of the current VAT rates and examples of products and services that they apply to:

Rate%Example Products/Services
Standard20%Most goods and services such as adult clothes, furniture, alcoholic drinks
Reduced5%Female sanitary items, children’s car seats and some energy-saving materials in the home
Zero0%Most food, coffee and children’s clothes
Exemptn/aInterest, bank charges, education, insurance, postal services, residential property rent

VAT has been cut from 20% to 5% for the Hospitality and Tourism between the 15 July 2020 and 12 January 2021. This include hotels, pubs and catering services. Find out more here.

VAT Rates

VAT Returns

A VAT return is the form you need to fill out to let HMRC know how much VAT you have collected from your customers and paid to your suppliers.

The return summarising your sales and purchases and VAT on them for a single VAT period.

vat return dates
Example VAT Return

Your VAT return is made up of 9 boxes. Here’s what gets included in each one:

Boxes 1 and 2 summarising VAT you have collected on your sales (or output tax) with any VAT on sales you made with other EC member states disclosed separately.

Box 4 relates to VAT on your total purchases (or input tax) that you want to reclaim.

Box 5 is the net amount you need to pay to HMRC or reclaim from them.

Box 6 contains your total sales excluding VAT for your VAT period.

Box 7 contains your total purchases excluding VAT for your VAT period.

Boxes 8 and 9 contain the value of sales and purchases supplied to/from any EC countries.

Almost all VAT registered businesses are now required to submit their VAT return and any VAT payments electronically.

Your VAT return need to be sent to HMRC using an HMRC approved software like Quickbooks, which means if you are VAT registered you’ll need to do your bookkeeping through your system and let it calculate your VAT for you.

VAT Record Keeping

You must keep your VAT records for at least 6 year and you cannot reclaim VAT on purchases if you do not have a VAT invoice to prove that you paid for it.

This means you have a system in place to make keeping your VAT records easy and efficient, as well as being easy to retrieve in case HMRC ever ask to see your paperwork.

Keeping Business Records When You’re VAT Registered

VAT Schemes

HMRC has launched many different VAT schemes and, although it can make things confusing when it comes to choosing the right one for you, they are designed to help with cash flow and reducing administration.

Here are the main VAT schemes that small businesses use:

  • Cash Accounting – only pay VAT to HMRC once your customers have paid you;
  • Annual Accounting – only submit one VAT return a year;
  • Flat Rate Scheme – pay VAT at a reduced rate to HMRC and avoid deducting for VAT that you pay;
  • Global Accounting – lets certain businesses pay 1/6th of the difference between the number of items sold in a quarter and the amount you spent on new purchases;
  • VAT MOSS – a VAT scheme requiring businesses supplying digital products and services in the EU to register for VAT;
  • Second-Hand Margin Scheme – saves money for second-hand businesses that sell to the general public;
  • VAT Reverse Charge – simplifies the VAT process where services are supplied between the UK and other EU countries.

VAT Schemes Explained

Voluntary VAT Registration

Even if your taxable turnover is below the vat registration limit of £85,000, you can choose register for VAT voluntarily.

Actually there are many businesses out there doing this because it means they can reclaim VAT that they pay and they hide their turnover.

Pros and Cons of a Voluntary VAT Registration

Paying Your VAT Bill

It is your responsibility to make sure that your VAT payment reaches HMRC by the payment deadline. There are penalties for missing the deadline.

There are a number of ways HMRC will accept your VAT payment including bank transfer and BACS.

How to Pay Your VAT Bill

VAT Penalties

If you are late filing your VAT return or paying your VAT, HMRC can impose a variety of penalties, surcharges and interest.

The consequences for missing your deadlines can be quite severe and in the most serious cases can lead to HMRC winding up your Company to get the money owed.

VAT Penalties, Surcharges and Interest

New Here? These are my most popular resources:

  • Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
  • Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
  • Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
  • VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
  • Invoice Template – Free template and step-by-step guide so you can get paid by your clients.
Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.