Your business is required to register for VAT in the UK once it has reached £85,000 of VAT-taxable sales (turnover) in a rolling 12-month period. Having a rolling year as the threshold decider means that your turnover count doesn’t start again when you hit your next financial year, but instead continues by dropping the oldest month and adding the latest for the calculation.

 

Not all products or services will fall under the 3 main VAT rates, and therefore they may be exempt sales such as insurances and postage, and as such businesses that sell only these goods or services cannot register for VAT. You can find out more about exempt goods and services here.

 

The 3 main rates in the UK are:

 

There are different schemes available such as flat rate and annual, and cash or accruals based, and the decision of which one to choose is something to talk to your accountant about as it can depend on the type of industry you are in, your cost to turnover ratios and the payment pattern of your customers as to what would suit you best.

 

 

You can apply for VAT for your business voluntarily if sales are below the threshold, but you will still need to apply VAT to all your sales once you have registered. VAT registration doesn’t allow a choice regarding who you do and don’t charge VAT, and therefore applying VAT to sales starts immediately from the effective date of registration which is either determined from the date the business went over the threshold or the start date can be chosen by you if earlier. There will however be exceptions with regards to geographic location of the client and whether they are deemed to be Out Of Scope for UK VAT, but again your accountant will be able to advise on this in more detail.

 

As well as charging VAT on your sales, your business will claim back the VAT it has incurred on supplies and purchases it has made. When you hold assets or stock you can reclaim VAT that was incurred at the date of purchase for up to 4 years before the date of registration. You must still have the asset or stock on hand in order to do so.

 

 

Most business will prepare VAT returns on a quarterly basis and submit this through software to HMRC. It is therefore important to have accounting software that can support MTD as this will be a strict requirement from April 2022 for all VAT-registered businesses – returns will no longer be able to be submitted manually through the HMRC website. Our recommended softwares are FreeAgent and Xero.

 

 

When you register or are thinking about registering, it is a good opportunity to look at pricing because changes need to be made to websites, invoices and other software that is used for recording sales and customers need to be informed that prices include VAT. It can be quite tricky for a business that sells to consumers as they will either need to increase their price by the relevant VAT rate or consume the tax within their existing sales price. 

For example, say a service currently sells for £100. The price can remain at £100 and therefore include the VAT amount in this price, or it be increased by adding 20%.

 

If the total price is kept at £100, the breakdown of this will be £83.33 + 20% (£16.67) of VAT. In this scenario, your business keeps the £83.33, with £16.67 going to HMRC as output tax.

If it’s decided to keep the £100 as income for the business, then £20 will be added as VAT which will the new VAT-inclusive price to £120. The £20 is then paid to HMRC as output tax.

 

One of the main pieces of advice we offer once a client is registered is to keep track of your VAT liability and start saving for this quarterly payment in a separate business account (or in a savings pot/space in your existing account). One way could be to transfer the VAT element of each sales receipt into this pot so that by the time your VAT return is due you have sufficient funds on hand to cover the liability. HMRC are strict with regards to payments and unless a payment plan is agreed with them in advance of the deadline then they may issue strict penalties on late payment.

 

 

In an effort not to overwhelm I have kept this brief but informative. More details can be found directly on the HMRC website with regards to the VAT rates for different goods and services and the schemes that are available, but I would recommend dropping us a line for a chat if it’s something you would like to discuss further.