What is VAT - Value Added Tax in UK

By Chris Andreou
|
Last updated
March 27, 2024
What is VAT - Value Added Tax in UKWhat is VAT - Value Added Tax in UK

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.

If you're a business owner in the UK, you've probably encountered the term "VAT" quite a bit. VAT, which stands for Value Added Tax, is a significant aspect of the British tax system. In this article, we'll break down the basics of what VAT is and how it affects businesses.

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

These topics are explained in greater detail in our VAT Registration guide. If you're an ecommerce entrepreneur, you may refer to our VAT guide for ecommerce businesses.

What is VAT - VAT Definition

VAT, or Value Added Tax, is a type of consumption tax. Businesses add it to the price of goods or services, and consumers pay it. This tax contributes to government revenue and is a percentage of the product's value. VAT is charged on most goods and services in the UK, including imports and exports as mentioned below:

  • business sales (i.e. goods or services you offer as a business)
  • business assets sales
  • items sold to staff (i.e. staff canteen meals)
  • commissions

How VAT Is Charged?

VAT is charged as a percentage of the total value of a product or service. Businesses collect this tax on behalf of the government and then remit it to the tax authorities. The tax is ultimately paid by the end consumer, but it is the responsibility of businesses to ensure it reaches the government.

  1. Standard Rate: The standard rate is the most common and applies to the majority of goods and services. The standard rate is 20%. tems and general services typically fall under the standard rate.
  2. Reduced Rate: The reduced rate is 5%, is applicable to select goods and services considered essential, including domestic fuel and power, children's car seats, sanitary products, and energy-saving measures.
  3. Zero Rate: Zero-rated goods are still VAT-taxable, but the rate of VAT you charge customers is 0%. You are still required to record these sales in your VAT accounts and report them on your VAT return. Zero-rated items include essential goods such as food, books, and certain medications. Additionally, exports to non-EU countries are often zero-rated.
What is Exempt from VAT?

While many goods and services are subject to VAT, there are exemptions. Some items, such as certain types of insurance, financial services, some education services and postage stamps, are exempt from VAT. This means that businesses providing these services do not charge VAT on them.

What is the Difference Between ‘Zero-Rate’ and ‘VAT-Exempt’?

The terms 'Zero-Rate' and 'VAT-Exempt' may sound similar, but there's a crucial difference. Zero-rated items are taxable, but the rate is set at 0%, while VAT-exempt items are not subject to VAT at all.

VAT Threshold 2024

Not all businesses are required to register for VAT. If your business's taxable turnover exceeds a threshold £85,000 in 2024, you must register for VAT. This threshold is based on the total value of your taxable supplies over a rolling 12-month period.

Registering for VAT

Once your business surpasses the VAT threshold, you are obligated to register for VAT with HMRC. Registration is a straightforward process and can often be done online. Once registered, you will be issued a unique VAT number.

  1. Check Your Eligibility:Determine if your business exceeds the £85,000 taxable turnover threshold in the last 12 months or is projected to do so in the next 30 days. If it does, you must register for VAT.
  2. Gather Business Information:Collect essential details about your business, including its legal name, address, date of incorporation, and specifics about your business activities and the goods or services you offer.
  3. Select a VAT Accounting Scheme:Choose a VAT accounting scheme that aligns with your business needs – options include standard accounting, cash accounting, or the flat rate scheme. Research each scheme to find the one that suits your business best.
  4. Register Online:Go to the UK government's website and register for VAT online. If you don't have one, create a Government Gateway account. Fill out the online VAT registration form with accurate and complete information to avoid any delays or errors.
  5. Await Confirmation:After submitting your VAT registration form, HM Revenue and Customs (HMRC) will review your application. Expect confirmation within a few weeks. Upon successful registration, you'll receive a VAT registration number and instructions on filing VAT returns.

VAT Accounting Scheme Thresholds

Scheme Threshold to join scheme Threshold to leave scheme
Flat Rate Scheme £150,000 or less More than £230,000
Cash Accounting Scheme £1.35 million or less More than £1.6 million
Annual Accounting Scheme £1.35 million or less More than £1.6 million

VAT Return

A VAT return in the UK is a document that registered businesses submit to HMRC to report their VAT (Value Added Tax) details. It includes information on the business's sales and purchases, the amount of VAT charged on sales (output tax), and the amount of VAT paid on purchases (input tax) during a specific period. You need to submit your VAT return one month and seven days after the end of your VAT period which occurs every 3 months (quarterly).

How GoForma can Help You with VAT?

Understanding and effectively managing VAT in the UK is important for the financial health of your business. Handling the complexities of VAT regulations, compliance, and optimizing your financial processes can be challenging. Consider hiring our small business accountants who specialize in VAT management. From seamless registration and selecting the right VAT scheme to ensuring accurate recordkeeping and expertly handling complex transactions, these professionals are your partners in financial success. Don't let VAT complexities hinder your business growth—take the next step towards financial excellence.

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