VAT

You must register for VAT if your taxable turnover exceeds £90,000 in any 12-month rolling period. This includes income from goods and services subject to VAT (excluding exempt or outside-the-scope items). You can also register voluntarily if your turnover is below the threshold, which can be beneficial if you incur significant input VAT and want to reclaim it.

Once registered, you must charge VAT on your sales, submit VAT returns, and keep digital records.

Tip. If most of your business is on business to business (B2B) basis, registering from the start will be beneficial to you.

There are three main VAT rates in the UK:

• Standard rate (20%) – applies to most goods and services.
• Reduced rate (5%) – applies to specific items, such as domestic fuel and children’s car seats.
• Zero rate (0%) – includes items like most food, books, and children’s clothing.

Some goods/services are exempt from VAT (e.g., insurance, education, and certain health services) or outside the scope (e.g., statutory fees). Knowing your correct VAT treatment is essential to avoid under- or overcharging VAT.

Tip. Business owners often mistake that all business transactions carry VAT. We have had instances of business owners claiming VAT on insurances and MOT’s, which is not applicable. Our advice is to only claim back VAT when you see it clearly on a receipt.

Making Tax Digital (MTD) is a government initiative that requires VAT-registered businesses to:

• Keep digital records
• Use HMRC-compliant software
• Submit VAT returns electronically through that software

As of April 2022, MTD is mandatory for all VAT-registered businesses, including those below the threshold. Penalties apply for non-compliance, so ensure your accounting system is set up correctly.

Tip. Don’t allow an accountant to dictate which software you must use. Accountants should work with you to make your life easier. If you get into an disagreement with them, you can be locked out of your own data. Choose a system that you are comfortable with and work with your accountant on making it work for you.

Generally, you can reclaim VAT on purchases made for business use, but there are exceptions, such as:

• Business entertainment costs
• Personal expenses
• Purchase of cars (unless used exclusively for business)
• Some travel and subsistence costs

To reclaim VAT, you must hold valid VAT invoices, and the expense must relate to taxable business activity. Input VAT must be adjusted if goods or services are partly for personal use.

Tip. You can claim back VAT on business expenses that you have paid for personally.

HMRC offers several simplified VAT schemes to help small businesses manage cash flow and reduce admin:

• Flat Rate Scheme – pay a fixed percentage of turnover instead of tracking input VAT (available to businesses with turnover under £150,000).
• Cash Accounting Scheme – pay and reclaim VAT based on when invoices are actually paid (instead of invoice date).
• Annual Accounting Scheme – file one VAT return per year with advance payments throughout.

Choosing the right scheme can improve your cash flow and reduce administrative burden. However, eligibility rules and sector-specific considerations apply.

Tip. If you are a business that has a high level of debtors or long payment terms with your customers, you would benefit (if eligible) to be on cash accounting. Cahs accounting allows businesses to claim and pay for VAT only once the payments are made.