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.
First things first – what is VAT?
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.
Examples of goods and services and their VAT rates
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 |
Who can register for VAT?
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.
When must I register for VAT?
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 should I start charging VAT?
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.
Why is VAT charged on top of recharged expenses?
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.
What happens if I don’t register for VAT when I should?
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.
Why would I consider voluntary VAT registration?
- 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’.
Why might I not want to register voluntarily?
- 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.
How do I register for VAT
Registering for VAT is usually done online – Gov.uk 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.
Standard Rate VAT vs Flat Rate VAT schemes
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 |
How do I know which VAT scheme is best for me?
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 |
Example using the 14.5% Flat Rate
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.
How often do I need to file a VAT return?
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.
How do I report VAT?
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.
What is VAT MOSS?
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.
What should I do next?
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.