UK VAT Explained for Beginner!

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Published: March 26, 2021
Last Updated: February 13, 2025

WHAT IS VAT?

VAT, Value Added Tax, is a tax applied on goods and services bought and sold within the UK. It was introduced in 1973 and is administered and collected by HMRC (Her Majesty’s Revenue and Customs). It is also levied on some goods and services imported from outside the UK.

WHAT VAT RATES ARE APPLICABLE?

Before we discuss the rate, you must understand that not all goods and services are chargeable with VAT. Hence, goods and services are categorised as VAT-rated and VAT-exempt. VAT-exempt goods and services are free from VAT, like finance, health services, private education, insurance, rent, postal services and gambling.

For VAT-rated product, there are three rates of VAT –

Standard Rate is levied at 20%
Reduced Rate is levied at 5%
Zero Rate is levied at 0%

Many confuse Zero Rate VAT with VAT-exempt goods and services. You must understand that these two are not the same. In the Zero-rated VAT case, goods and services are still VAT-taxable, but you don’t charge your customers any VAT. As a business owner, you still need to record the sales in your VAT accounts. You need to report them on your VAT Return, and further, you can reclaim VAT on your expenses.

WHO NEEDS TO REGISTER FOR VAT?

Businesses need to register for VAT once the turnover reaches the threshold of £85,000 within 12 months (on a rolling basis). This is irrespective of the size or structure of your business. The threshold is based on your sales or turnover and not the profit, and this threshold tends to change, so you need to keep yourself updated with such changes. You need to register with HMRC if over the past 12 months your ‘taxable supplies’ have reached or exceeded the VAT threshold.

Another scenario where you need to register for VAT is when you expect your turnover to exceed the threshold in a single 30-day period.

Lastly, you need to register for VAT if you sell VAT-exempt goods and services, but you purchase goods more than £85,000 from EU VAT-registered suppliers to use in your business.

You can also register for VAT voluntarily even if you don’t fall in the above three categories. There are a few benefits of doing so, which we will talk about further in this article.

WHEN SHOULD I START CHARGING VAT?

In the first scenario, where your turnover reaches the VAT threshold in a rolling 12-month period, you have to start charging VAT from the first day of the second month after you exceed the threshold.

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

WHY REGISTERING FOR VAT VOLUNTARILY IS BENEFICIAL?

Few advantages of registering voluntarily for VAT are –

As a business owner of a growing business, it is easy to lose track of the turnover and forgetting when it crosses the threshold. However, this could attract a penalty from HMRC.
In a few cases, VAT is required for doing dealing with other businesses. It helps avoid further delay if you have registered earlier voluntarily, as a VAT registration certificate is not something which you get instantly you register.
Lastly, as a VAT registered business, you can claim back VAT on the goods and services that you buy for your business.

Having a VAT registered business have many more advantages. Talk to your accountant and understand whether registering for VAT can be beneficial for you or not. Having a VAT registered business can boost your business reputation and customers trust level, especially if you have a new business. It will give the impression that your business is larger and more well organised and established than it may be.

WHEN IS VOLUNTARILY VAT REGISTRATION NOT BENEFICIAL?

While voluntarily VAT registration has its benefits, it depends on business to business. Voluntary VAT registration can be disadvantageous for you if most of your clients are smaller companies and not VAT registered themselves. In this case, the inclusion of VAT will only make your product more expensive, provide they cannot claim it.

VAT registered business have additional responsibilities which consume a lot of time and money in case of non-compliance. Be it filing VAT return or keeping electronic records, voluntarily registering for VAT can bring up many issues that you could have avoided in the first place.

HOW DO I REGISTER FOR VAT?

We have understood what VAT is, and now it is time to learn how to register your business for VAT. Before registration, you must decide whether you should register for Standard Rate VAT or Flat Rate VAT. After that, you can register for VAT online via www.gov.uk, where you create your VAT online account. Through this VAT online account, you will be able to submit your VAT Returns to HM Revenue and Customs (HMRC). There are also options for registering through post or over the phone. In this case, once you receive your VAT registration number, you can go online and sign up for a VAT online account.

HOW IS VAT CALULATED?

You will need to work out the VAT calculation when you are a registered business. Your goods and services price can be either VAT-inclusive or VAT-exclusive.

For VAT-inclusive price, simply multiply the price (exclusive of VAT) by 1 + VAT percentage (i.e. if it is 5%, then you should divide by 1.05). For VAT-exclusive price, simply divide the price (exclusive of VAT) by 1 + VAT percentage.

For example, John sells a product price of which is £10 (VAT-exclusive) and this product attracts a Standard Rate which is levied at 20%. Here the total amount will be £12 (10 * 1.20). Now, if John was selling the product VAT-inclusive for £10, in that case, the price of the product is £8.3 (10 / 1.20).

HOW TO RECLAIM VAT ON MY PURCHASES?

As a business owner, you need to reclaim VAT on purchases made for business (excluding personal purchases). This helps you to reduce your expenses to some extent. You can claim VAT on petty cash payments on purchases up to £25 from VAT registered supplier without a receipt. Other than this, you need to provide HMRC with the appropriate evidence.

Reporting, filing and paying VAT can be a tedious process, especially if you’re a small business owner whose focus is to grow a business. We at Whiz Consulting can help you with this process as well as your accounting and bookkeeping process for seamless financial operations while achieving overall business growth