Guide to Value Added Tax (VAT) for small businesses

VAT is something that many new business owners overlook. Many assume that it doesn’t apply to them – surely it’s just for the bigger businesses out there? That may be true most of the time, but VAT could still apply to your business so it’s important to know about it.

If you’re either a sole trader, or limited company owner looking to get clued-in about all things VAT, keep reading. We’ll take you through whether you need to register, how to register and what you need to do next.

What is VAT?

VAT or Value Added Tax is a tax levied on the sale of goods or services in the UK. Businesses who are VAT-registered must charge their customers VAT on the goods/services they’re selling and then pay this tax to HMRC on a quarterly basis.

How does VAT work?

VAT works in two ways for business owners – you charge VAT and you pay VAT.

VAT-registered businesses must charge their customers VAT on goods or services they sell. They will also pay VAT when they buy things like stock, raw materials or services for the business.

However, when a VAT-registered business pays VAT, they can claim that back as a business expense.

This means that a business will only pay HMRC the difference between the amount of VAT they’ve charged vs. the amount they’ve paid. If a business has paid more VAT than it’s collected from customers, HMRC will pay the difference.

For example, if you have paid more VAT on things like accountancy services or office equipment than you’ve charged your own customers, good news! HMRC owes you money. On the other hand, if you have charged customers more than you have paid on your purchases, you will need to pay the difference to HMRC.

Do I need to register for VAT?

The short answer is maybe. Whether you need to register for VAT or not will depend on how much money you’re making.

Any business with a turnover of £85,000 or more per year must register for VAT. It doesn’t matter whether you’re a sole trader or a limited company. VAT for sole traders works in the same way as it does for limited companies. If you hit that threshold, you will need to register and charge VAT on the products/services you sell.

You can also register before hitting the threshold voluntarily. There are a few benefits to doing this, but it all depends on your business.

Should you voluntarily register for VAT?

In some cases, it can actually be beneficial to register for VAT. The two main benefits of voluntarily registering for VAT are:

1. You can reclaim VAT

If you buy a lot of supplies/services from other VAT-registered businesses, you’ll end up paying a lot of VAT on those goods or services. However, if you register for VAT yourself, you may be able to reclaim some of that VAT you’ve paid.

2. Your business appears more professional

The other main benefit of registering for VAT is that it makes your business look more professional and established. One of the downsides of being a sole trader is that other businesses may not take you as seriously as they would a limited company. Being VAT-registered is a way to show them that you are a serious, established business. Of course, if you’re a limited company – and become VAT registered – you have the best of both worlds.

How do I register for VAT?

The good news is that registering for VAT is a bit easier than it sounds. In fact, most businesses can register online through HMRC’s online services.

Alternatively, if you have an accountant, they can register on your behalf and take care of your VAT returns as well.

When registering for VAT, you will need to provide details such as:

  • Company name (if a limited company)
  • National Insurance number (NI)
  • Unique taxpayer reference (UTR)
  • Your turnover
  • General business details
  • Bank details

What happens after you register for VAT?

Once you have registered for VAT, you’ll be sent a VAT Registration Certificate within 30 working days. Make sure you keep hold of this because it will have your VAT number which you’ll need for submitting VAT returns.

It will also have your “effective date of registration” and the submission deadline for your first VAT return – so make sure you put those dates in the calendar.

Charging and reclaiming VAT

One you are a newly-VAT-registered business, there are a few things you need to do:

  • Work out what VAT rates apply to your products/services
  • Charge customers the correct VAT
  • Display VAT information on customer invoices
  • Submit quarterly VAT returns

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.

Current VAT rates

At the moment, the standard rate of VAT is 20%, which applies to most purchases. However, there are three rates you need to know about.

  • Standard Rate: This is charged at 20% and applies to most goods or services sold.
  • Reduced Rate: If you sell items classified under the reduced rate, you will have to charge 5% instead. The reduced rate applies to things like domestic fuel, energy or children’s car seats.
  • Zero Rate: Certain goods fall under the zero-rate, including food, books and children’s clothing. With the zero-rate, this just means you can’t charge your customers VAT on these goods.

For example, if you are selling kitchen appliances, you will need to charge the standard rate of 20%. If you are selling children’s car seats, you will need to apply the reduced rate of 5%.

Once you know how much you need to charge, you will need to include your VAT information on any invoices you send out to customers.

The next step as a VAT-registered sole trader is to create and submit VAT returns.

How do I create VAT returns?

Once you have collected VAT from customers, it’s not a simple case of just transferring that to HMRC. Instead, businesses must submit a VAT return which shows how much VAT has been collected and how much the business has paid

Most businesses will need to complete VAT returns each quarter which must be submitted within one month and 7 days of the end of the relevant period. For example, if your VAT return is due on 30 September, you will need to file and make payment by 7 October.

For VAT returns, you will be expected to submit them digitally due to the Making Tax Digital scheme. This just means you will need to create VAT returns through approved accounting software and submit them through HMRC’s VAT online service.

If you have an accountant, they will be able to create and file VAT returns for you and deal with HMRC on your behalf. This will make the whole process a bit easier for you.

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.

Last updated: 27th February, 2021

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