VAT

VAT is a tax that's charged on most goods and services that VAT-registered businesses provide in the UK. It's also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries.

VAT is charged when a VAT-registered business sells to either another business or to a non-business customer.

When VAT-registered businesses buy goods or services they can generally reclaim the VAT they've paid.

There are three rates of VAT, depending on the goods or services the business provides. The rates are:

  • standard - 20 per cent
  • reduced - 5 per cent
  • zero - 0 per cent

There are also some goods and services that are:

  • exempt from VAT
  • outside the UK VAT system altogether

Who charges VAT and what VAT is charged on

VAT-registered businesses add VAT to the sale price of most goods and services they provide.

When you must register for VAT

If you're a business and the goods or services you provide count as what's known as 'taxable supplies' (see 'What is VAT charged on' below) you'll have to register for VAT if either:

  • your turnover for the previous 12 months has gone over a specific limit - called the 'VAT threshold' (currently £77,000)
  • you think your turnover will soon go over this limit

You can choose to register for VAT if you want, even if you don't have to.

How VAT is charged and accounted for

If you're VAT-registered the VAT you add to the sale price of your goods or services is called your 'output tax'. The VAT you pay when you buy goods and services for your business is called your 'input tax'.

Filling in your VAT Return

If you're VAT-registered you'll have to submit a VAT Return at regular intervals - usually quarterly - the return shows:

  • the VAT you've charged on your sales to your customers in the period - known as output tax
  • the VAT you've paid on your purchases - known as input tax

If the amount of output tax is more than the input tax, then you send the difference to HM Revenue & Customs (HMRC) with your return.

If the input tax is more than your output tax, you claim the difference back from HMRC.

There are special schemes that some businesses can use to help them work out and pay their VAT.

What is the Annual Accounting Scheme?

Using standard VAT accounting, you must complete four VAT Returns each year. Any VAT due to HM Revenue & Customs (HMRC) is payable quarterly, and any VAT refunds due to you are repayable quarterly.

Using the Annual Accounting Scheme, you make either nine interim payments at monthly intervals, or three quarterly interim payments, throughout the year. You only need to complete one return at the end of each year. At that point you must pay any outstanding amount. If you have overpaid, you will receive a refund.

If you have been registered for VAT for less than 12 months, your interim payments are based on an estimate of the VAT you expect to owe for the coming year. If you have been registered for VAT for 12 or more months, your interim payments are based on your previous year's actual VAT payments. 

Who can use the Annual Accounting Scheme?

You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes the VAT itself, VAT-exempt supplies and capital asset sales.

Once you are using annual accounting you can continue to do so as long as your estimated VAT taxable turnover remains below £1.6 million. 

What is the Cash Accounting Scheme?

Using standard VAT accounting you:

  • pay VAT on any invoices you have issued, even if you have not received the payment from your customer
  • reclaim VAT on any invoices you have received, even if you have not yet paid your supplier

Using the Cash Accounting Scheme, you:

  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your suppliers

Who can use the Cash Accounting Scheme

You can use the Cash Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes VAT itself, supplies that are exempt from VAT, and capital asset sales.

Once you start to use cash accounting, you can continue to do so until your VAT taxable turnover reaches £1.6 million.

What is the Flat Rate Scheme for VAT?

Using standard VAT accounting, the VAT you pay to HM Revenue & Customs (HMRC) or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

Using the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. 

Who can and can't join the Flat Rate Scheme?

Who can join the Flat Rate Scheme

You can join the Flat Rate Scheme for VAT and so pay VAT as a flat rate percentage of your turnover if:

  • Your estimated VAT taxable turnover - excluding VAT - in the next year will be £150,000 or less. Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets.

Generally you don't reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000 - see the section in this guide on claiming back VAT on capital assets for the rules and restrictions.

Once you join the scheme you can stay in it until your total business income is more than £230,000.