A Small Business Guide to VAT

October 21, 2021 9:27 am Published by

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Understanding and ensuring compliance with VAT can be intimidating for small business owners, especially those who are unfamiliar with HMRC’s rules and regulations.

This blog post has been created to explain in simple terms what you need to know as a small business owner about VAT, from how to register and file VAT returns, to VAT exemptions and transfers.

Please note, that the information in this guide is correct at the time of publication but is subject to change and may do so following the Autumn budget on 27th October 2021.

An Introduction to VAT

VAT refers to “Value Added Tax” and is charged on most sales of goods and services in the UK.

The standard rate of VAT is 20%, but some items have reduced rates or even a 0% VAT rate.

The UK VAT rates for tax year 2021/2022 are as follows:

Rate % Of VAT Applicable to
Standard 20  

The majority of goods and services

Reduced 5  

Select goods and services, e.g., home energy and children’s car seats

Zero 0  

Zero-related goods and services e.g., most food and children’s clothes

As of 1st October 2021, the temporary 5% reduced rate of VAT for those in the leisure and hospitality sector was replaced by a new reduced rate of 12.5%. This new rate will remain in effect until 31st March 2022.

Find out more about this temporary reduced rate of VAT and the affected supplies.

VAT Exemptions

Some goods and services are exempt from VAT, the aim being to make them more accessible to the general public. Often, these will include services such as healthcare and charitable fund raising, as well as other services deemed necessary for public access.

Examples of goods and services exempt from VAT include:

  • Education or training
  • Most Food and drink items
  • Physical education and sports activities
  • Antiques
  • Postage stamps

You can get more information about the VAT rates of specific goods and services on the Gov.uk website.

When Should You Register For VAT?

By law, you must register for VAT if your business’ annual taxable turnover is above £85,000 or is set to cross this threshold within the next 30 days. Failing to do so could result in a penalty for failure to notify.

Whilst £85,000 is the amount whereby registering for VAT becomes compulsory, you can still choose to become VAT registered if your annual taxable turnover is below this amount.

Why Register for VAT?

The main reason businesses choose to become VAT registered voluntarily is to be able to reclaim VAT on business expenses incurred. It is also possible to claim on certain items purchased prior to the date of VAT registration.  Registering can also make your business appear larger or more established than it is, which can aid winning business from larger clients.

Before deciding to become VAT registered voluntarily, you will need to consider whether or not your customers are also VAT registered. If they are not registered businesses or consumers, they will not be able to reclaim VAT on any of your products or services you charge VAT on, and therefore your prices may seem less competitive, in which case it might make sense to wait until you have to legally register.

How to Register for VAT

To get started, the easiest way is to register for VAT online. If accepted by HMRC, you will be provided with a VAT or Government Gateway account through which you must  submit your VAT returns using your unique VAT reference number.

What are Your Responsibilities After You Register?

Once your business is registered for VAT, you must charge VAT on all taxable sales to your customers. You will then also be able to claim VAT back on goods or services used for the operation of your business. You will need to calculate and submit VAT returns to HMRC and ensure that all VAT liabilities are paid on due dates or face penalties.

Depending on the sector of your business, there may be other regulations you must follow in addition to the usual rules for VAT registered businesses

Those in the construction industry, for example, must also consider their sales, purchases and accounts for Reverse Charge VAT where applicable as of 1st March 2021.

It is crucial that the accounting software being used can handle reverse charge VAT and that those responsible for preparing VAT returns are familiar with how reverse charge VAT works.

VAT Returns

VAT registered businesses must declare to HMRC how much VAT they have charged and how much they have reclaimed. To do this, businesses must file a regular VAT return which is then used to calculate the business’ output VAT minus the input VAT, and the difference is what must be paid to HMRC.  Most accounting software will calculate and prepare VAT figures for submission in VAT returns.

How to File a VAT Return

You must submit your VAT return online unless your business is exempt. You will need both a VAT number and a VAT online account to submit your VAT return using HMRC’s free online service or alternatively, your accountant can complete this for you using compatible accounting software. 

Be aware that businesses above the VAT threshold are legally required to submit VAT using Making Tax Digital (MTD) compliant software. Any business in the UK that should be complying with MTD VAT regulations but are not registered, will be liable for penalties.

From April 2022, all VAT registered businesses, regardless of annual turnover, will be required to submit their VAT returns using MTD compliant software and so it is highly recommended that VAT registered businesses who are not already filing VAT returns in this way, should begin doing so in preparation for April 2022.

Read more about Making Tax Digital and what it means for your business.

When To File A VAT Return

The deadline for submitting your business’ online VAT return will depend on when you first registered for VAT, but most businesses are required to submit once every three months.

Generally, you should submit your VAT return no later than 1 calendar month and 7 days after the end of an accounting period, but you can get the specific dates for your business from HMRC or by searching for it in your VAT online account.

Reclaiming VAT 

Businesses can reclaim the VAT paid on goods and services purchased for use within the business. Some areas where you can reclaim VAT include the following:

  • Staff travel
  • Vehicles used solely for business purposes
  • Fuel and maintenance for business vehicles
  • Rent payments
  • IT equipment

Transferring VAT registration

If you take over a new company or your business changes status, such as from a partnership to a sole trader, you can transfer a VAT registration from one business to another

It usually takes around 3 weeks for HMRC to confirm the transfer and you can do this via the Gov.uk website

Cancelling VAT Registration

In some situations, you may wish to cancel your business’ VAT registration, such as if you cease trading or you join a VAT group.

You can cancel your VAT registration through the Gov.uk website and should submit a final VAT return for the period up to and including your cancellation date.

Need a Hand?

If you need help with the management of your business accounting or are looking for support with VAT, we can help. For more information, give one of our team a call on 0117 379 0810 to arrange a free, no-obligation consultation.

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