What VAT is
VAT is a tax on most goods and services. Once registered, you charge VAT on what you sell (output tax), reclaim VAT on what you buy for the business (input tax), and pay the difference to HMRC, usually every quarter.
When you must register
You must register for VAT if either of these is true:
- Your taxable turnover over any rolling 12 month period goes above the registration threshold.
- You expect your taxable turnover to go above the threshold within the next 30 days on its own.
The threshold is measured on a rolling basis, not on your accounting year, so you need to watch your running 12 month total. The current registration threshold and the slightly lower deregistration threshold are on GOV.UK. The registration threshold was raised in recent years, so confirm the figure rather than relying on an older number.
You can also register voluntarily below the threshold. Founders often do this when their customers are VAT registered businesses that can reclaim the VAT, because it lets you reclaim VAT on your own costs.
The main rates
- Standard rate, which applies to most goods and services.
- Reduced rate, for a limited set of things such as some home energy and children's car seats.
- Zero rate, for items such as most food and children's clothes, where VAT is technically charged at 0 percent.
Some supplies are exempt, such as certain financial services and insurance, which is different from zero rated and affects what you can reclaim. Check the correct rate for what you sell, since applying the wrong rate is a common and costly mistake.
Making Tax Digital
VAT registered businesses must keep digital records and file VAT returns using compatible software under Making Tax Digital. Set this up when you register so your bookkeeping is compliant from the start.
Practical points for a new company
- Track your rolling turnover so you register on time. Registering late can mean paying VAT you never charged, plus penalties.
- Decide on voluntary registration based on who your customers are and how much VAT you incur on costs.
- Choose an accounting scheme. Schemes such as the Flat Rate Scheme or cash accounting can simplify VAT or improve cash flow for smaller businesses. Check current eligibility on GOV.UK.
- Price with VAT in mind. If you sell to consumers, adding VAT after registration effectively raises your prices unless you absorb it, so plan for it before you cross the threshold.