Most people have heard of VAT but not many understand it, and we know that it’s confusing for many self-employed, contractors and small business owners.

Although the ins and outs may be tricky to grasp for first-timers, the sooner you get your head around HMRC’s VAT rules the better it will be for your business.

VAT – or Value Added Tax – is a tax charged on most goods and services in the UK and the EU. When you buy a product that is eligible for VAT in a shop, for example, VAT is automatically included in the price you pay.

There are three rates of VAT which are applied to goods and services. Standard Rate (currently 20%), Reduced Rate (currently 5%) and Zero Rate (0%, obviously). Items may also be exempt (or ‘outside the scope’) of VAT.

“Aren’t Zero Rated VAT and VAT exempt the same thing?”, you may be asking. Well, no. Zero-rated means that the goods are still VAT-taxable but you don’t charge your customers any VAT. You still have to record these sales in your VAT accounts and report them on your VAT Return, which means you can reclaim VAT on your expenses.

VAT exempt items are outside of all VAT schemes and are not taxable. You don’t include sales of exempt goods or services in your taxable turnover for VAT purposes. If you buy exempt items, there’s no VAT to reclaim.

In both cases, you don’t add VAT to the selling price, but zero-rated goods or services are taxable for VAT – albeit at 0%.

Sales of zero-rated items count as ‘taxable sales’ as far as the registration threshold is concerned, along with sales that are subject to 5% or 20% VAT.


Here are some examples of goods and services and their VAT rates:

Standard Rate (20%) Reduced Rate (5%) Zero Rate (0%) Exempt
Web Design services Energy efficiency materials (insulation etc.) Books Most financial services
Electronics (laptops, smartphones etc.) Domestic utilities (gas, electricity etc.) Newspapers Insurance
Consultancy Nicotine patches Protective clothing (helmets, boots etc.) Lottery tickets
Photography services Property renovations and alterations Printing of brochures Funeral costs
Purchasing software or software licenses Sanitary products Buying a helicopter! Houseboat moorings
Majority of other goods and services Children’s car seats Most construction activities Postage stamps

There’s a common misconception that only people operating their own limited company can register for VAT, when actually VAT registration is open to sole traders as well. You can voluntarily register whenever you like, but there comes a point when legally you must register.


Legally, you must register for VAT when:

  • Your VAT-taxable turnover (the total of all sales that aren’t exempt from VAT) exceeds the current threshold of £85,000 within a 12-month period (on a rolling basis)
  • You expect your VAT-taxable turnover to exceed the threshold in a single 30-day period
  • You only sell goods or services that are exempt from VAT, but you purchase goods to use in your business to the value of more than the threshold from VAT-registered suppliers in the EU

You need to register for VAT within 30 days of meeting any of these criteria.

If you know your turnover will reach the threshold soon, you should allow enough time to register. If you fail to notify HMRC in time, you may be liable to pay a penalty!

There are some situations in which it may be beneficial to register voluntarily before you reach the threshold.


When your turnover reaches the VAT threshold in a rolling 12 month period, you must start charging VAT from the first day of the second month after you exceeded the threshold.

For example, if on 30th June 2019, your sales for the previous 12 months are £85,000, then your VAT registration date will be 1 August 2019.

When you expect to exceed the threshold in a single 30-day period, you must start charging VAT immediately.

Recharges are costs that your business incurs when supplying goods and services which you pass on to your customers. If you’re VAT registered, you’ll need to charge VAT on the amount recharged to the client, even if the expenses your business initially incurred and paid for are not subject to VAT.

A good example is a train ticket, which is not subject to VAT rules. If you pay £100 for your ticket, you include that amount as an expense in your company accounts. However, if you pass the cost on to your client and include it on a sales invoice, you need to add VAT. This situation is quite different to your client reimbursing expenses at cost.

There’s no requirement for you to charge the client the same amount you paid in expenses. So using the above example, if you decided to charge your client £150, you would need to add VAT to that amount.


If you’re late in registering, HMRC will retrospectively register your business from the date you should have started charging VAT. You’ll need to add VAT to all sales made from this retrospective date, regardless of whether you actually charge your clients VAT, so you could well lose out if you don’t register when you should. HMRC may also issue you with a financial penalty.

If you know your turnover will reach the threshold soon, you should allow enough time to register. If you fail to notify HMRC in time, you may be liable to pay a penalty!

There are some situations in which it may be beneficial to register voluntarily before you reach the threshold.


  • You can reclaim the VAT on your business expenses (if you are on the Standard Rate scheme)
  • You can register for a reduced Flat Rate of VAT to reduce the administration involved in preparing your quarterly VAT return (Flat Rate scheme)
  • If your clients are large companies who are themselves VAT registered, registering could be advantageous. Your clients will be used to seeing prices inclusive of VAT, and will be able to reclaim the VAT paid over to your business
  • It may make your business more credible in the eyes of your clients, in the same way that having a limited company makes you appear more ‘professional’.
  • If your clients are smaller companies and not VAT registered themselves, the addition of VAT may make you seem more expensive. Registering for VAT usually requires you to add 20% to your invoices, and if your client isn’t VAT Registered, they can’t reclaim this
  • With VAT registration comes additional responsibility. You’re required to complete and file a VAT return, usually every three months. If a return is late, there will be a penalty from HMRC
  • From 1st April 2019, if you’re above the VAT threshold, you need to comply with Making Tax Digital for Business rules, which means keeping electronic records and submitting digitally using approved software
  • When you’re VAT registered, it can be more difficult to keep track of your cash flow and profit.

Registering for VAT is usually done online – has all the information you need for how to do it. Firstly you need to decide whether you should register for Standard Rate VAT or Flat Rate VAT.


When you register for VAT, you have two choices of schemes. The first, Standard Rate VAT, involves reclaiming VAT on every eligible item you buy or sell. The second, Flat Rate VAT, is open to businesses with an expected turnover of less than £150,000 (in the next 12 months) and was introduced to simplify the VAT system for freelancers, contractors, and small businesses.

On the Flat Rate VAT scheme, you’ll use a predetermined VAT rate based on your industry type and pay this over to HMRC. First, you add the Standard VAT rate of 20% to your sales invoice amount, then you collect the full amount from your client. Next, apply your sector percentage to this (gross) amount, which is then paid over to HMRC via a VAT return. The difference between the two rates is retained by your business (limited company) as income.

There’s a range of VAT rates for specific industry types available below.

Type of business 2019/20 flat rate (%)
Accountancy or bookkeeping 14.5
Advertising 11
Agricultural services 11
Any other activity not listed elsewhere 12
Architect, civil and structural engineer or surveyor 14.5
Boarding or care of animals 12
Business services not listed elsewhere 12
Catering services including restaurants and takeaways 12.5
Computer and IT consultancy or data processing 14.5
Computer repair services 10.5
Entertainment or journalism 12.5
Estate agency or property management services 12
Farming or agriculture not listed elsewhere 6.5
Film, radio, television or video production 13
Financial services 13.5
Forestry or fishing 10.5
General building or construction services 9.5
Hairdressing or other beauty treatment services 13
Hiring or renting goods 9.5
Hotel or accommodation 10.5
Investigation or security 12
Labour-only building or construction services 14.5
Laundry or dry-cleaning services 12
Lawyers or legal services 14.5
Library, archive, museum or other cultural activity 9.5
Limited cost trader 16.5
Management consultancy 14
Manufacturing fabricated metal products 10.5
Manufacturing food 9
Manufacturing not listed elsewhere 9.5
Manufacturing yarn, textiles or clothing 9
Membership organisation 8
Mining or quarrying 10
Packaging 9
Photography 11
Post offices 5
Printing 8.5
Publishing 11
Pubs 6.5
Real estate activity not listed elsewhere 14
Repairing personal or household goods 10
Repairing vehicles 8.5
Retailing food, confectionary, tobacco, newspapers or children’s clothing 4
Retailing pharmaceuticals, medical goods, cosmetics or toiletries 8
Retailing not listed elsewhere 7.5
Retailing vehicles or fuel 6.5
Secretarial services 13
Social work 11
Sport or recreation 8.5
Transport or storage, including couriers, freight, removals, and taxis 10
Travel agency 10.5
Veterinary medicine 11
Waste or scrap dealing 10.5
Wholesaling agricultural products 8
Wholesaling food 7.5
Wholesaling not listed elsewhere 8.5

Generally, when deciding whether to register and on what scheme, you need to look at your turnover, the type of clients you have, and the expenses you incur that you can claim VAT on.

The table below is a guide to which scheme may be more appropriate for you. It’s important to remember that this should only be used as a guide, nothing beats getting direct support from one of our expert accountants to discover what’s best for you and your business.


Turnover VAT- taxable expenses Client type Suggested VAT option
Less than £85,000 Less than 1.5% of turnover Mostly non-VAT registered customers Don’t register for VAT
Any More than 1.5% of turnover Mostly VAT registered customers Register for standard rate VAT
More than £85,000 Less than 1.5% of turnover Any Register for Flat Rate VAT

Your business charges £1,000 to a client for services your company provides. The client will pay £1,200 including the Standard Rate of VAT amount at 20% (£200). Your business pays HMRC the industry Flat Rate of VAT amount at 14.5% of £1,200 which is £174. The business accounts for the difference (£26) as income.

You can’t reclaim the VAT paid on your purchases under the Flat Rate scheme – except for certain capital assets over £2,000. Flat Rate sector percentages include the following industries:

Industry Sector Rate Industry Sector Rate
Limited cost trader 16.5% Accountancy 14.5%
IT Consultancy 14.5% Computer Repair 12.5%
Photography 11% Other B2B services 12%
Journalism 12.5% Any other service 12%


When you register for the Flat Rate scheme for the first time, HMRC allows you to apply a 1% discount in the first year.


You’ll need to file a VAT return every 3 months. If you do not file a return when it is due, you’ll incur a penalty from HMRC.


For registered business, a VAT return is required (usually every quarter) to tell HMRC how much VAT you have paid and received. All VAT returns are filed online, and can usually be handled by your accounting software. Depending on your income and expenses, you may need to to make a VAT payment to HMRC or you may be owed a refund.

From 1st April 2019, all VAT-registered businesses will need to submit their VAT returns digitally, under the government’s new “Making Tax Digital” initiative.


VAT MOSS (short for Value Added Tax: Mini One Stop Shop) is a way of paying VAT for businesses supplying digital services to other EU countries.

VAT MOSS is a relatively complex process – you have to pay based on the rate of VAT applied in the country where the customer bought your product, and not the rate prevailing in the country where you, the seller, is based. It was introduced to enable UK businesses to pay VAT over to HMRC in a single transaction, rather than registering for and paying VAT in multiple EU countries. VAT MOSS is paid quarterly: on 20th April, 20th July, 20th October and 20th January.

We can’t be sure whether VAT MOSS will survive the post-Brexit overhaul, but we’ll keeping an eye on developments in the near future.


If you’re close to the VAT threshold (or think you may be), then your accountant should be able to advise you on whether you should consider registering and what scheme would be best for you.