What is VAT? UK VAT basics

As a business, you are probably charged VAT on most of the goods and services you buy. That means charging your customers VAT, keeping VAT records and paying the VAT you’ve collected to HMRC.

Read this article to learn more about VAT and discover what Making Tax Digital is and what it means for your business.

What are the different VAT rates?

There are three rates of VAT that can be applied, depending on the goods or services provided:

Businesses add VAT to the price they charge when they provide goods and services.

This applies to both business and non-business customers. For example:

• A flower wholesaler will add VAT to the amount they charge a florist
• A beauty salon will include VAT in the price they charge to their customers

There are some goods and services that are exempt from VAT (such as dental services) while non-business activities (such as hobbies) are also outside the scope of VAT.

How will I know when to register for VAT?

If you’ve just started in business or have a relatively low turnover, you’re not required to register for VAT. This means you can’t reclaim the VAT you pay when you purchase goods and services.

You will need to register for VAT if your business grows and annual sales of taxable goods and services exceed the £85,000 VAT threshold.

Registering for VAT means you need to charge your customers VAT. But if your customers are VAT registered businesses they can reclaim the VAT you have charged. It also means you can reclaim any VAT you pay, so reducing your costs.

Rather than paying HMRC all the VAT you collect from your customers, you first deduct the VAT you have been charged on the business supplies you have bought.

Even if you are under the VAT threshold, registering for VAT might boost your profits and can give your business the appearance of being bigger and more established.

I’ve already registered for VAT, what next?

Once you’ve registered for VAT you will need to start keeping VAT records – details of the VAT you have been charged and the VAT you have charged your customers.

If your business is VAT-registered, you should charge VAT on the goods and services you provide, and reclaim the VAT you pay when you buy goods and services for your business.

Read more about Making Tax Digital and VAT:

• Making Tax Digital checklist: How to ensure you’re ready for MTD
• Making Tax Digital for VAT: What do HMRC’s updates mean for you?
• How to register for VAT online: A straightforward guide
• Is the VAT Flat Rate Scheme right for your business?

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What is Making Tax Digital?

Making Tax Digital is the UK government’s new initiative that will digitise the tax system.

From 1 April 2019, VAT registered businesses in the UK with a taxable turnover of more than £85,000 (over the VAT threshold) will have to submit their VAT returns using functional compatible software.

Making Tax Digital for VAT is the first part of the scheme. Other taxes including income tax, self-assessment and corporation tax will follow in the future – timings will be announced by HMRC.

A number of businesses are either exempt from Making Tax Digital or have a deferred start date of October 2019. It’s worth checking to see whether your company is in the exempt or deferred category.

Our Making Tax Digital checklist has more details on the scheme and, if it applies to you, how you can prepare for it. This handy infographic below covers the basics on the VAT element of the scheme too.

Follow these simple steps to get started with VAT

• Check with your accountant or HMRC what rate of VAT applies to the goods/services you sell
• Find out which accounting scheme will be best for your business
• Use HMRC approved accounting software to help handle records, invoicing and online returns

If you haven’t registered for VAT, keep track of your taxable turnover so you know when to register.

Editor’s note: This article was first published in August 2017 and has been updated for relevance.