VAT - What it is and how do I register?

Value Added Tax (VAT) is a tax imposed on most goods and services in the UK, typically at the standard rate of 20%.

Typically, small businesses dont need to charge VAT to their customers; however, they may still need to pay it to their suppliers. It's a complex area of the tax system and requires some knowledge to get your head around it.

What exactly is VAT?

VAT is a tax which is added to products and services by VAT-registered businesses.

The amount of VAT charged varies depending on the country in which you operate, the products you sell and what type of products they are. For example, a physical item is taxed differently from a digital item, and the rules for tax on food differ from those for a vacuum cleaner or kettle.

Most countries operate a VAT scheme of some sort. In the UK it's managed by HM Revenue & Customs (HMRC).

Consumers can be unaware that they are paying VAT and what the different rates are. Take the following example: a customer walks into the supermarket and is charged a total amount for their shopping; this is whats known as the gross amount. The customer doesnt need to know that their frozen ready-meal is exempt from VAT, whereas their frozen ice cream has 20% VAT added to the price.

On the other hand, if youre a business, you can only charge VAT to your consumers if youre VAT-registered.

At the time of writing ^{November 2024}, VAT is mainly charged at one of three bands - zero rate (0%), reduced rate (5%) and standard rate (20%). The rate used depends on the product itself. Groceries, for example, are generally zero-rated (but takeaways aren't), whereas children's clothing is often 5%.

3D Maze symbolising complexity

Confused? It can be hard to get your head around it all, but there are accountants with many years of experience who can help you with this should you have any queries.

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Do I have to register?

There are two types of VAT Registration - voluntary and mandatory.

Mandatory registration happens if your sales turnover exceeds £90,000 or is predicted to do so in the near future. However, if your sales turnover is below that, you can still register on a voluntary basis.

Why would I want to voluntarily register to pay a tax?

It's a good question. There are several benefits to voluntarily registering for VAT:

You can appear to be a bigger business than you are; your clients may not know you have voluntarily registered and may assume that youve hit the threshold
If your input tax (that's what you pay out to suppliers) is more than your output VAT (that's the VAT you charge customers), then you may be able to claim it back from HMRC
When you do hit the threshold, there are no risks of late registration penalties, giving you added peace of mind

How do I register?

You can register online, although there are exemptions for this, which can be found on the gov.uk website. If you meet one or more of the exemptions, you must register by post.

If you need to register by post, the application form and additional guidance notes can be found on the gov.uk website.

Registering Online

You can register directly with HMRC on their website.

You may find that your accountant may be able to help you register for VAT too.

VAT Returns

Once you have registered for VAT, you will need to submit a quarterly return to HMRC. This is known as your accounting period and will span 3 months. The return covers things such as:

your total sales and purchase value
the amount of VAT you can reclaim on purchases
the amount of VAT you owe from sales
the amount, if any, of VAT refunded by HMRC

Online accounting software can help you keep on top of this and keep track of your sales, too. You can also sign up for reminders on the HMRC website.

Of course, we like to help businesses with a number of different areas, so between The Company Wizard and its sister company QuickFile, we can help you register and manage your VAT invoices and returns simply.