A Guide to VAT for Ecommerce Businesses

Chris Andreou

May 26, 2021

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Introduction

At Forma, we work with startups and small businesses across industries. As such, we’re familiar with many of the challenges that ecommerce solopreneurs and small business owners face on a day-to-day basis.

You need to wear multiple hats and juggle numerous tasks—including dealing with VAT. It can be complex, and is one of those things that can make even an experienced entrepreneur break out in a cold sweat. 

To help you along, we’ve put together a resource to help you understand the basics of VAT, and stay ahead of post-Brexit changes.

What is VAT?

Simply put, VAT is a type of consumption tax added to the cost of most goods and services for both B2C and B2B markets. 

In this article, we won’t delve into the basics on VAT—instead, we’ll be focusing more on recent VAT changes and FAQs. But if you need more information on VAT essentials, you can refer to our guide on VAT registration, thresholds and schemes. It covers the following: 

  • Different VAT rates in the UK: Standard rate, reduced rate and zero rate.  
  • VAT registration, invoices and record keeping requirements
  • Cancelling your VAT registration
  • VAT accounting schemes 

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When is VAT registration mandatory?

UK businesses must register for VAT if the following conditions apply:

  • Your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). The VAT taxable turnover refers to the total value of everything that you sell that isn't exempt from VAT. 
  • You expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
  • Your business had a taxable turnover exceeding £85,000 over the last 12 months

Businesses selling goods in the UK using online marketplaces must register for VAT if these conditions apply: 

  • You’re an overseas seller, and the online marketplace provides you with the VAT details of a business customer
  • You’re an overseas seller selling goods located in Northern Ireland at the point of sale and sold to customers in Northern Ireland
  • You’re an overseas seller with goods stored in the EU, and your total annual sales to customers in Northern Ireland exceeds £70,000

If you’re an EU business selling to UK customers, VAT registration may be mandatory if you’ve determined that the post-Brexit VAT changes apply to your business. We’ve outlined these changes in the section below. 

What happens after you’ve registered for VAT?

Once you've registered for VAT, you'll need to:

  • Abide by HMRC's record keeping requirements
  • Issue VAT invoices
  • Submit your VAT returns on time

There are additional requirements if you’re using online marketplaces:

  • Provide your VAT registration number to every online marketplace you offer goods for sale in the UK. The OMPs will need to verify your registration number and display it on their website.
  • Use the same business name indicated in your VAT registration when you open a trading account on an online marketplace.

What are the post-Brexit UK VAT changes?

Below, you’ll find an overview of the post-Brexit VAT changes. Bear in mind that this is just a summary of the key changes. If you need further information or personalised advice, reach out to our VAT consultants.

Exporting goods to the EU: 

  • VAT registered UK businesses are still able to zero-rate sales of goods to EU businesses. 
  • EU member states will treat goods entering the EU from the UK in the same manner as goods entering from other non-EU countries. Import VAT, along with any other customs duties are due upon the arrival of goods in the EU. 
  • Common Transit Convention: The UK remains in the Common Transit Convention (CTC). This simplifies trade and reduces the administrative burden for UK businesses exporting their goods. For instance, businesses can defer import VAT and custom duties until the goods arrive in their destination country, and are able to do away with completing additional import or export declarations. 
  • Additional resources: HMRC, European Commission: Brexit FAQs
  • EC Sales List: Previously, UK VAT-registered businesses that met specific conditions and were supplying goods to VAT-registered customers in the EU had to complete an EC Sales List. 
  • This is no longer required. Businesses will have until 21 January 2021 to submit EC Sales Lists for sales made on or before 31 December 2020. Submitting EC Sales Lists is still required if you’re selling goods from Northern Ireland to VAT-registered customers in the EU. 
  • Distance selling threshold: Previously, smaller businesses selling to EU customers were able to benefit from the distance selling threshold. Businesses did not need to register for VAT in the EU country they were selling to, unless their annual sales exceeded the distance selling threshold (£70,000).
  • Starting from 1 January 2021, UK sellers can no longer take advantage of the distance selling thresholds. 
  • Additional resources: HMRC’s guide to exporting goods from the UK

Importing goods from the EU to the UK:

  • Abolition of Low Value Consignment Relief (LVCR): The LVCR, which relieves import VAT on goods valued at £15 or less will no longer apply to goods imported into the UK, or for goods supplied to Northern Ireland from outside the UK and EU.  
  • Postponed VAT accounting: Starting from 1 January 2021, UK VAT registered businesses importing goods from locations worldwide into the UK can use a new system known as postponed VAT accounting. This enables them to account for import VAT on their VAT return, rather than paying for it when the goods arrive at the UK border. 
  • Custom declarations and payment of other duties are still required. Tariffs will apply to certain goods. Excise duties will continue to apply to tobacco, alcohol and certain types of energy products. 
  • Duty deferment account: Payments for customs and excise duty can be deferred, and settled through monthly payments. Sellers need to register with HMRC to open a duty deferment account.
  • The £135 threshold: Starting 1 January 2021, the point at which VAT is collected on imported goods valued at up to £135 is moved from the point of importation to the point of sale. UK supply VAT—not import VAT—will be charged at the point of sale.   
  • If the sale is facilitated through an online marketplace (OMP), the OMP will be responsible for collecting and accounting for the VAT.
  • If the imported goods are sold directly to consumers in the UK, the overseas seller will be responsible for registering with HMRC and accounting for the VAT. 
  • The new rules will also apply to B2B sales up to £135 in value. There’s an exception: if the business customer is VAT registered in the UK and provides its VAT registration number to the seller, the customer will account for the VAT through a reverse charge mechanism. 

Additional resources:

EU VAT refund system: 

  • UK businesses can continue to claim eligible refunds of VAT from EU member states, but this will need to be done using the existing refund system for non-EU businesses. 
  • The way in which the refund system operates varies across each EU country, so businesses will need to check the requirements in each EU country where they incur VAT.

Additional resources:

EU VAT Registration Number Validation service: 

  • The EU VAT Registration Number Validation service enables businesses to check the validity of a customer or supplier’s VAT number. UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU businesses, but UK VAT registrations will cease to be included.
  • Use HMRC’s online service to check UK VAT numbers
  • Use the European Commission website to check EU VAT numbers

VAT flat rate scheme: 

  • The VAT flat rate scheme no longer applies to any sales a seller makes through an online marketplace, where the OMP is liable to account for VAT. Sellers may choose to leave the scheme at any time. Those who remain in the scheme are required to abide by its conditions, including the restriction on VAT recovery.

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FAQs on VAT

Does VAT apply to delivery charges?

This varies depending on the circumstances in which the goods are supplied. 

If a seller imposes a delivery fee, VAT will apply on the charges at a similar rate. This means that there will be a 20% VAT on delivery for goods that are standard-rated. If delivery is provided free of charge, then VAT will not apply as it is accounted for on the value of the goods. 

Is zero-rated the same as VAT exempt?

No, zero-rated is not the same as exempt. 

If an item is zero-rated, it is still VAT taxable, but the rate of VAT that you charge to customers is 0%. You’re still required to record these sales in your VAT accounts, and report them on your VAT return. Additionally, sales of zero-rated goods will count towards your VAT threshold.

You don’t have to record sales of exempt goods on your VAT return, and they don’t count towards your VAT threshold.

Does Making Tax Digital (MTD) for VAT affect my business?

MTD for VAT Phase 2 was rolled out on 1 April 2021. For the time being, the new requirements will only apply if your taxable turnover exceeds the VAT threshold (£85,000).

From April 2022, it is mandatory for all VAT-registered businesses to comply with MTD, regardless of their annual turnover.

Additional resources:

What happens if my business fails to meet VAT requirements?

UK ecommerce sellers may face HMRC penalties. HMRC may also notify online marketplaces you trade through about your VAT non-compliance, which may result in your business being removed from the marketplace. 

If you’re an overseas seller, HMRC may impose a penalty, ask you to pay a cash deposit or bond or direct you to appoint a VAT representative established in the UK. If you fail to comply with these measures, HMRC may notify online marketplaces you trade through about your VAT non-compliance, which may result in your business being removed from the marketplace.

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Featured Article

Post-Brexit Guide: Importing from EU to the UK

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How do I register for VAT? Guide

How do I register for VAT?

You can register for VAT online through creating a VAT online account (also known as the 'Government Gateway' account). You'll need your online account to submit your VAT returns.

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How do I find my VAT rate?

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What is the VAT Flat Rate Scheme? Guide

What is the VAT Flat Rate Scheme?

The VAT flat rate scheme is one of the various VAT schemes business owners can register for, in which a fixed rate of VAT is paid to HMRC. The scheme simplifies the VAT return process for small businesses, saving them the hassle of tracking VAT on purchases.

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How do I register for standard rate VAT? Guide

How do I register for standard rate VAT?

Most businesses can register for VAT online, or appoint an accountant or agent to complete your registration and deal with HMRC.

There are certain instances where you must register by post. You should use the form VAT1 if you want to apply for a ‘registration exception', are joining the Agricultural Flat Rate Scheme or if you're registering the divisions or business units of a body corporate under separate VAT numbers.

Refer to the HMRC website for information on when you need to register by post using the form VAT1A, VAT1B or VAT1C.

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What is VAT: registration, thresholds and schemes Guide

What is VAT: registration, thresholds and schemes

VAT is simpler than it is usually made out to be, but you need to approach it step by step and crunch the numbers involved to find your best way to deal with it.

This is because, in addition to the normal way of paying VAT (known as the Standard Rate Scheme), HMRC also offers the Flat Rate Scheme, the Cash Accounting Scheme and the Annual Accounting Scheme for small businesses with turnover under a certain amount.

Each of these change your tax liability and how you pay in different ways. We shall deal with them at the end of the article.

The Standard Rate Scheme is the essence of VAT however, and it neither overly complex nor particularly difficult to get your head around.

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What are the disadvantages of VAT registration? Guide

What are the disadvantages of VAT registration?

The drawbacks of VAT registration are:

  • Administrative burden. As a VAT-registered business, there are VAT rules and record keeping requirements you'll need to comply with.
  • It makes your goods or services seem more expensive. Charging VAT can make your goods and services more expensive-and therefore less appealing, particularly if your customers or clients are not VAT-registered business, or are end consumers who aren't able to reclaim VAT.
  • You may be faced with an unexpected VAT bill. If your output VAT is higher than the input VAT, as it nearly always will be, then you need to pay the difference to HMRC. This can create cash flow issues if you're unprepared for an unexpected VAT bill.
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Managing invoices whilst waiting for VAT registration Guide

Managing invoices whilst waiting for VAT registration

During the time between submitting your application and waiting for your VAT registration number, you won't be able to issue VAT invoices or to show VAT as a line item on your invoices.

To get around this issue, you can include VAT in the invoice total amount-without indicating VAT as a line item or showing it in your invoice. For instance, if you're charging a client £100 for a service rendered, you'll invoice the client for £120 to account for the standard rate VAT of 20%.

When you've received your VAT registration number, you can then reissue the invoice for £100 (and include £20 VAT as a line item).

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VAT Calculator Guide

VAT Calculator

Working out the VAT

With our calculator, you can work out your VAT in just a few quick clicks.

If the price doesn't include VAT:

  • Select the ‚ÄòAdd VAT' option
  • Select the rate of VAT on the slider
  • You'll obtain the gross price (inclusive of VAT) and the VAT element of the bill.

If the price includes VAT:

  • Select the ‚ÄòExclude VAT' option
  • Select the rate of VAT on the slider
  • You'll obtain the pre-VAT price (exclusive of VAT) and the VAT element of the bill.

VAT basics: What you need to know

VAT, or Value Added Tax is a consumption tax that is applied to most goods and services. While the standard rate (20%) applies in most cases, there are items-such as children's car seats and sanitary products-that are charged at the reduced rate of 5%. Using the slider on our calculator, you'll be able to calculate the VAT and gross or net prices for different VAT rates. If you're unsure about the correct rate you should apply, refer to HMRC's resource on VAT rates.

Resources:

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Ultimate VAT Guide Guide

Ultimate VAT Guide

  • What is VAT
  • When to register for VAT
  • VAT rates
  • Exempt/ Out of Scope VAT items
  • VAT filing responsibilities
  • De-registering for VAT
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How do I find my VAT number? Guide

How do I find my VAT number?

You can locate your VAT number on the VAT registration certificate issued by HMRC. Your VAT number will contain nine digits, with the first two digits indicating the country code (‘GB' for UK businesses).

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Should I charge VAT for international/ overseas sales? Guide

Should I charge VAT for international/ overseas sales?

Whether or not VAT should be charged on your sales to your overseas clients all depends on what HMRC refers to as the place of supply of your services.

Generally, if your client is a business customer, the place of supply will be where the client is based but if they are a non-business customer, the place of supply will be where you are based.

For most contractors, this means that your place of supply is generally where your customer is based.

If your place of supply is in another EU country, you do not need to charge UK VAT - providing they are a registered business in their country. You will need to request their VAT registration number and display this on your invoices. It will also need to be reported to HMRC within your VAT return and a separate EC sales list.

If your place of supply is in a country other than the EU then you do not need to charge VAT as it is outside the scope of VAT entirely. No further actions are needed for this other than not including VAT on your invoices.

If you are looking to check if you need to charge VAT or need assistance with any other VAT matters, contact one of our VAT experts today.

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What are the advantages of VAT registration:? Guide

What are the advantages of VAT registration:?

The advantages of VAT registration are:

  • It enhances the perception of your business: Registering for VAT tends to lend credibility to your business, and makes your company appear larger and more established.
  • You can reclaim VAT: You can reclaim VAT on goods and services you've purchased from other businesses, and this can be advantageous in certain situations.
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What are the advantages vs disadvantages of VAT registration? Guide

What are the advantages vs disadvantages of VAT registration?

The advantages of VAT registration are:

  • It enhances the perception of your business: Registering for VAT tends to lend credibility to your business, and makes your company appear larger and more established.
  • You can reclaim VAT: You can reclaim VAT on goods and services you've purchased from other businesses, and this can be advantageous in certain situations.

The drawbacks of VAT registration are:

  • Administrative burden. As a VAT-registered business, there are VAT rules and record keeping requirements you'll need to comply with.
  • It makes your goods or services seem more expensive. Charging VAT can make your goods and services more expensive-and therefore less appealing, particularly if your customers or clients are not VAT-registered business, or are end consumers who aren't able to reclaim VAT.
  • You may be faced with an unexpected VAT bill. If your output VAT is higher than the input VAT, as it nearly always will be, then you need to pay the difference to HMRC. This can create cash flow issues if you're unprepared for an unexpected VAT bill.
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How do I claim back VAT? Guide

How do I claim back VAT?

You can reclaim VAT by submitting a VAT return.

You need to have valid VAT invoices, keep records as proof for your claim and show how you calculated the business proportion of a purchase.

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What are the VAT rates for different goods and services? Guide

What are the VAT rates for different goods and services?

There are three VAT rates: standard rate (20%), reduced rate (5%) and zero rate (0%). VAT is not charged for exempt or out of scope items, and the standard rate applies to most goods and services. Refer to HMRC's resource for further information on what VAT you should charge based on the type of goods or services you provide.

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There's no denying that starting an ecommerce business is hard work. There are many decisions to be made, and multiple aspects you need to plan and strategize-from choosing a business model and products, to registering your company, creating a well-thought-out exchange and returns policy and more.

To help, we've put together a comprehensive guide to getting started. We'll run through the essentials, starting with the main types of ecommerce business models you should consider.

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When should I charge VAT? Guide

When should I charge VAT?

You should charge VAT when your business becomes VAT registered-whether the registration is mandatory or voluntary.

VAT registration is mandatory when:

  • your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). The VAT taxable turnover refers to the total value of everything that you sell that isn't exempt from VAT.
  • you expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
  • your business had a taxable turnover exceeding £85,000 over the last 12 months

If you're thinking about registering for VAT voluntarily, these are the main benefits and downsides you should consider:

Benefits:

  • It enhances the perception of your business
  • Able to reclaim VAT

Downsides:

  • Administrative burden
  • It makes your goods or services seem more expensive
  • You may be faced with an unexpected VAT bill
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A Guide to VAT for Ecommerce Businesses Guide

A Guide to VAT for Ecommerce Businesses

At Forma, we work with startups and small businesses across industries. As such, we're familiar with many of the challenges that ecommerce solopreneurs and small business owners face on a day-to-day basis.

You need to wear multiple hats and juggle numerous tasks-including dealing with VAT. It can be complex, and is one of those things that can make even an experienced entrepreneur break out in a cold sweat.

To help you along, we've put together a resource to help you understand the basics of VAT and stay ahead of post-Brexit changes.

Read Full GuideRead Full GuideCalculate Now

Download Now:

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VAT overview Guide

VAT overview

VAT is a type of consumption tax added to the cost of most goods and services for both B2C and B2B markets. There are three rates of VAT: standard rate, reduced rate and zero rate. VAT is not charged on exempt or out-of-scope items.

As a small business owner or self-employed worker, there are a few key aspects you need to understand about VAT. These are:

  • When is VAT registration mandatory?
  • If I'm considering voluntary VAT registration, what are the benefits and downsides I need to consider?
  • How do I register for VAT?
  • What do I need to do after I've registered for VAT?
  • VAT accounting schemes

We explain these in greater detail in our VAT guide.

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When do I need to register for VAT? Guide

When do I need to register for VAT?

VAT registration is mandatory when you fulfill the conditions indicated below, and you're required to register within 30 days of fulfilling any of these conditions.

  • Your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). The VAT taxable turnover refers to the total value of everything that you sell that isn't exempt from VAT.
  • You expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
  • Your business had a taxable turnover exceeding £85,000 over the last 12 months
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The flat rate VAT scheme explained Guide

The flat rate VAT scheme explained

At first glance, VAT can seem like one more aspect of your business that adds to your administrative tedium. Yet, as a small business owner, you want to run your business in the most tax efficient way possible-and VAT is a common area where business owners are losing out.

Even if you've hired an accountant, you need to have a good grasp of the essentials.

Below, we'll dive into an aspect of VAT that business owners often raise questions about the flat rate VAT scheme. We'll run through the basics, touch on recent regulatory changes and share our answers to frequently asked questions about the scheme.

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Standard vs Flat Rate VAT Scheme Calculator Guide

Standard vs Flat Rate VAT Scheme Calculator

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How do I set up a VAT Direct Debit Payment? Guide

How do I set up a VAT Direct Debit Payment?

You can use your VAT online account to set up a Direct Debit payment.

Do note that Direct Debit payments take at least three working days to clear. As such, you should set up the Direct Debit at least three working days before submitting your online VAT return, or the payment won't be processed in time.

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How do I calculate flat rate VAT? Guide

How do I calculate flat rate VAT?

The tax you pay is calculated by multiplying your VAT flat rate with your VAT-inclusive turnover. The flat rate you use will depend on the sector your business falls under.

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When do I pay VAT? Guide

When do I pay VAT?

The deadline for paying HMRC submitting your VAT return online are usually the same-one calendar month and seven days after the end of an accounting period.

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Should I register for VAT? Guide

Should I register for VAT?

There are instances whereby VAT registration is mandatory, such as when your VAT taxable turnover exceeds the current threshold of £85,000. If you're not legally required to register for VAT, you'll then need to weigh out the benefits (enhances image, reclaim VAT) against the downsides (administrative burden, unexpected VAT bills).

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Can I claim VAT back on my mileage? Guide

Can I claim VAT back on my mileage?

You can reclaim VAT on the fuel portion of your mileage expenses if you don't pay a fixed rate under the Flat Rate Scheme.

You can reclaim all the VAT on fuel if you use your vehicle exclusively for business.

If your vehicle is driven for both business and personal use, you may handle VAT in the following ways:

  • Reclaim all the VAT and pay the fuel scale charge for your vehicle
  • Reclaim the VAT on fuel you use for business trips
  • Don't reclaim any VAT. This may be the better option if you use your vehicle for business purposes on rare occasions, such that the fuel scale charge exceeds the VAT you can reclaim.
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Best Ecommerce Accounting Software (and How to Choose) Guide

Best Ecommerce Accounting Software (and How to Choose)

As an ecommerce merchant, managing your business finances can quickly get out of hand if you don't have a proper system in place, and the right tools to support it.

Perhaps you've experienced a growth spurt, and using spreadsheets to manage your accounts doesn't cut it anymore. Or you realise that you're spending increasing amounts of time each week manually tracking your orders, inventory and accounts.

These are signs that it's time to make the switch to an accounting software. If you're wondering, ‘how do I choose?', look no further.

In our guide, we dive into:

  • Key features you should look for
  • Question to ask (when choosing an ecommerce accounting solution)
  • Best ecommerce accounting software
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What flat rate VAT percentage do I apply for multiple business sectors? Guide

What flat rate VAT percentage do I apply for multiple business sectors?

If your business can be classified under more than one sector because you provide different types of services or products, you'll then use the percentage that applies to the majority of your services or sales, and apply that to your total sales.

Let's say you're running a hair salon-cum-restaurant business. If 70% of your sales is derived from providing hair and beauty treatments, you'll then apply a VAT flat rate of 13% (for hairdressing and beauty treatment services) to your total turnover.

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What are VAT Returns? Guide

What are VAT Returns?

A completed VAT Return will either show how much is owed to HMRC or whether you're due a refund.

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Do I need to register for VAT? Guide

Do I need to register for VAT?

You need to register for VAT if:

  • your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). The VAT taxable turnover refers to the total value of everything that you sell that isn't exempt from VAT.
  • you expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
  • your business had a taxable turnover exceeding £85,000 over the last 12 months

You need to register for VAT within 30 days of fulfilling any of these conditions.

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How do I register for flat rate VAT? Guide

How do I register for flat rate VAT?

You'll first need to check that you're eligible for the VAT Flat Rate Scheme.

If you're eligible, you can join the scheme online when you register for VAT, or submit the VAT600 FRS through one of the methods below:

BT VAT

HM Revenue and Customs

BX9 1WR

You'll receive notification that you've joined the scheme through your VAT online account, or by post if you did not apply online.

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How do I pay VAT? Guide

How do I pay VAT?

There are various ways to pay your VAT bill.

Online or telephone banking (Faster Payments) and CHAPS payments are processed on the same day or the next working day.

Direct Debit, Bacs payments, standing order (only for businesses using the Annual Accounting Scheme or Payments on Account), online payments (by debit or corporate credit card) or payments made at your bank or building society are processed on a three day cycle.

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How to Start an Ecommerce Business Guide

How to Start an Ecommerce Business

  • Types of Ecommerce Business Models
  • How to/ if you need to register your business
  • Accounting software requirements
  • Understanding VAT
  • Brexit Import checklist
  • Brexit Export checklist
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How do I deregister for VAT? Guide

How do I deregister for VAT?

You can cancel your VAT registration online, or by sending form VAT7 via post.

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