What is VAT?

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

When your business makes sales, you don’t charge VAT to your customers unless you’re registered with HMRC to do so. Sales on which VAT would normally be charged are called “taxable sales” or “VATable sales”. Sales exempt from VAT, or outside the scope of UK VAT, are not taxable.

The VAT threshold for registration in 2023 is £85,000. This has been fixed in place since 2017 and will remain the same until 31 March 2024.

When to register for VAT

You must register for VAT when:

  • your total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold*)
  • you expect your turnover to go over £85,000 in the next 30 days

What are the benefits of registering for VAT?

  • You’ll appear to be a bigger business if you’re charging VAT, as the current limit for compulsory registration is £85,000 on VATable turnover (2023/24).
  • If you sell to VAT-registered businesses they can reclaim the VAT from HMRC so your selling price is still competitive and you can recover the VAT on your costs.
  • Maintaining up-to-date records will provide better information for running your business.
  • You can claim VAT on certain items that you purchased prior to the date of VAT registration. Talk to your accountant about the exact details.
  • If you are in a VAT reclaim situation then you will definitely be better off.
  • You’re likely to receive repayments because your VATable sales are lower than your VATable costs. This may be because you’re accumulating stock or your sales are below the standard rate of 20% at either the reduced rate of 5% or zero rate of 0%.

Can you voluntarily register for VAT below the threshold?

Depending on what type of business you run and what expenses you claim, you might be better off registering for VAT. You can register for VAT at any point – even if your turnover is less than £85,000.

VAT exemption

Although most goods and services are taxed at 20% VAT, some products are taxed at a reduced VAT rate or are exempt from VAT altogether. If something is exempt from VAT, it’s usually because the product is considered an essential good or service.

Here are some examples:

  • Antiques
  • Lottery tickets
  • Charitable fundraising events
  • Water and wind turbines
  • Books

HMRC has a full list of VAT exemptions here.

How to register for VAT.

There are two ways you can register:

To register you will need: 

  • A National Insurance (NI) number or your tax identifier (Unique Taxpayer Reference – UTR)
  • Details of other businesses you’ve owned within the past two years
  • Your business bank account details
  • If you bought the business, you’d need to supply records of the sale.

If you’re registering online you will also need a Government Gateway user ID and password (this is what you log in to HMRC with). 

Hire an accountant.

If this all sounds too complicated then you can, of course, appoint an accountant or agent to do this for you. This is something we do for our customers all of the time and we’d be happy to help you too!

Contact us here.

Choosing a VAT scheme.

During the application process, you’ll be asked which VAT scheme you’ll use. Here’s an idea of the different schemes:

  • Standard VAT accounting. You record the VAT collected on each sale and the VAT paid on each purchase, then submit a VAT return to HMRC every quarter.
  • Annual VAT accounting. Some businesses can submit a VAT return once a year, however, they are still expected to pay quarterly. Those quarterly payments are based on your last return or an estimate.
  • Flat-rate scheme. Certain smaller businesses can skip all the VAT accounting and simply pay a percentage of their turnover as VAT. An accountant or bookkeeper can help you decide if this makes sense for your business. 
  • Cash accounting scheme. Under cash basis accounting, you’re assumed to have collected or paid VAT when money changes hands. Under all the other schemes, you’re assumed to have collected or paid VAT as soon as an invoice is raised.

What happens when you register for VAT?

After you’ve registered for VAT you’ll get:

  • a 9-digit VAT number which you must include on all invoices you raise.
  • information about when to submit your first VAT return and payment.
  • confirmation of your registration date (known as your ‘effective date of registration’).
  • You’ll get this in your online VAT account or by post, depending on how you registered.

From you’re effective date of registration you’ll need to:

  • Add VAT to your prices
  • Issue VAT invoices to your customers
  • File VAT returns and pay any VAT due to HMRC
  • Keep digital VAT records and a VAT account

If you want to read more about how to make tax digital then click here.