ByteStart’s 60-Second Guide to Value Added Tax (VAT) for Start-Ups and Small Businesses

overview of VAT for small business

Value Added Tax (VAT) is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution. Most business-related goods and services will therefore be subject to VAT.

There are several UK VAT rates, the standard rate currently being 20%.

When to register your business for VAT

Your company should register for VAT if the value of your taxable supplies in the past 12 months or less has exceeded the current VAT registration threshold of £85,000 (from 1st April 2018), or the value of your taxable supplies in the next 30 days alone is expected to exceed this threshold.

This threshold applies for the 2018/19 tax year, and usually increases each tax year by £1,000 or so. It is important to remember that turnover is the amount of sales the business is making, not the profit.

Registering for VAT may be beneficial

Even if your business turnover lies below the current VAT threshold, you can still register for VAT, since there may be business benefits in doing so. It is worth checking this with your accountant or directly with HMRC.

Basically, a business will pay VAT on all purchases it makes (known as ‘input tax’) and then charge VAT on all sales it makes (known as ‘output tax’).

If a VAT-registered business receives more output than input tax in a VAT period, it will pay the difference to HMRC, otherwise the HMRC will refund the difference if the business pays more VAT than it receives.

How to register for VAT

You will need to register for VAT with HMRC. You can submit a paper application form or you can apply online but HMRC do encourage businesses to register online. The information you need to provide depends on whether you are running your business as a sole trader, partnership or limited company.

You can register for VAT online and access the paper application forms from this page of the HMRC website.

If your application is accepted HMRC will send you a registration certificate and your VAT number.

Charging and reclaiming VAT

Once you are VAT registered, you will need to include your VAT number on all your invoices. You will also need to update your invoicing templates to take account of the additional tax you need to charge your customers.

As well as charging VAT to your customers, when you are a VAT-registered business you can usually claim back from HMRC the VAT that you have paid on your business expenditure.

To reclaim VAT you must have a ‘valid VAT invoice’ for the expense. The information that needs to be included on a valid VAT invoice includes;

  • Supplier’s invoice number
  • Supplier’s name and address
  • Supplier’s VAT registration number
  • Details of the product or service supplied
  • Date
  • Total cost excluding VAT
  • Amount of VAT charged

To ensure that you can reclaim the VAT you have paid, you should check the supplier’s VAT registration number. There are two ways to do this, and they are detailed in our guide on Checking to see if a VAT registration number is valid.

Submitting your VAT returns

All businesses regardless of size and incorporation need to submit their VAT returns and pay their VAT bills online.

To submit your VAT returns online, you will need to sign up for VAT online services. If you already use HMRC online services, you can simply add this service once your business is VAT-registered.

If you aren’t already using HMRC online services you will need to get a User ID and password, which is sent out by post, to use the service.

Some online accounting packages allow you to submit your VAT returns directly from your accounts system. This can save valuable time, and cut out the possibility of any costly errors.

Further VAT information

This article provides a very high level outline of standard business VAT. For more You can find more specific information and guidance on various aspects of the VAT scheme in some of our other guides;

For more detail, you can also visit the dedicated HMRC VAT section.

More help on ByteStart

As well as tackling VAT issues, ByteStart also brings you lots of help and tips on all aspects of starting and running a successful small business. Check out some of our most popular guides;

Funding your business

Tax & Accounting

Starting Up


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