How well do you understand UK Value Added Tax (VAT)?
Are you administering it correctly as part of running your business?
For entrepreneurs and business owners, VAT is a likely to be a potential constant that crops up on the to-do list. Whether you're starting up or simply trying to stay VAT compliant, you'll find that this tax is a lot more sophisticated than just charging or reclaiming it through your invoices.
Whilst our other post, how does VAT work, covers many of the fundamentals, in this post we address the common and more nuanced questions that can catch out even the most experienced owner managers. By checking through this Q&A you'll be able to cut through some of the complexity to obtain practical responses to the challenges and opportunities that can arise in a growing business when you collect this tax on behalf of H M Revenue & Customs (HMRC).
VAT is complex but with the right guidance and correct systems and processes, you can stay compliant. There may even be opportunities to improve your business cashflow. Key to this is reviewing your VAT compliance regularly as your business grows and potentially diversifies.
VAT stands for Value Added Tax and is applied at a standard rate of 20%. VAT was introduced in the UK on 1 April 1973 and is a tax on consumption, collected on business transactions and imports/acquisitions. It is charged at each stage of supply (also known as output tax) and businesses can reclaim VAT on their purchases (referred to as input tax). HMRC is responsible for managing VAT.
A transaction is subject to UK VAT if it involves the supply of goods or services, occurs within the UK, is conducted by a taxable person as part of their business activities, and qualifies as a taxable supply.
When do I need to register for VAT?
You must register for VAT if your business’s taxable turnover exceeds the current registration threshold of £90,000. This is calculated on a 12-month rolling basis and not the calendar or tax year. So, if you anticipate that you're going to trade over the threshold in the near future, then it may be wise to register for VAT.
Monitoring your turnover is therefore essential, the reason being a late registration can lead to backdated liabilities and also penalties. There are also certain trades (such as where goods or services are purchased from outside of the UK) that could trigger registration regardless of your turnover amount.
The place of supply refers to the place where a supply is made and VAT may be charged and paid. For business-to-business services, the supply is usually classified as where the business customer belongs, while for non-business entity customers the supply tends to be where the supplier is based.
The tax point refers to when exactly the supply of goods or services took place, the date of the transaction for VAT purposes. This is important as it can then determine the VAT period in which the transaction belongs and therefore the VAT return in which you need to include the transaction. As part of this you must include the tax point on the VAT invoice.
Some small businesses can instead account for VAT on a cash basis, namely when money is received as opposed to the accrual basis when a service is provided or a product is delivered.
Output tax is the VAT due on the taxable supplies of a VAT registered business. Taxable supplies in general means sales. The tax that must be paid to HMRC is calculated by subtracting any recoverable input tax (see below) from the total output tax figure.
In some cases, the customer must also account for output tax. This occurs in instances where there are mixed supplies with the application of different VAT rates. Such scenarios are likely to transpire where there are cross border transactions that require the fair apportionment of the total price.
Taxable persons can reclaim input tax on goods and services used for taxable business supplies. VAT cannot be recovered on non-business use items. For mixed-use items, VAT is apportioned.
Some items, like motor cars and business entertainment, are non-deductible. Special rules apply for input tax before VAT registration and after de-registration. For leased cars VAT is 50% recoverable, and 100% recoverable if only for business use and a vehicle that's part of a fleet.
VAT invoices must be issued for standard, or reduced-rated, supplies to other taxable persons in the UK. So, if you're registered and charging VAT on goods or services, then you need to provide an invoice. Various software including Microsoft Word and Excel, and most accounting software packages have invoice templates you can make use of.
The benefit of using accounting software is that you only enter your details once, then every time you produce an invoice and request payment within a deadline, your details are already saved in your own template. Furthermore, the software automatically calculates any VAT due enabling you to keep a track of your liability when it comes to filing your VAT return.
Your invoice needs to be HMRC compliant and must include the following:
There are 3 main VAT rates:
Each rate is applied to the goods and services in question. It is the responsibility of businesses to collect and manage VAT, and to then report it accurately to HMRC.
The standard VAT rate in the UK is 20%, and it applies to most goods and services supplied by VAT-registered businesses. This indirect tax is calculated by adding 20% to the sale price. Typical examples include electronics, adult clothing, and the majority of professional services.
The reduced VAT rate of 5% is applied to certain specified UK goods and services. This includes products like sanitary items, energy-saving materials, and children’s car seats. The purpose of this lower rate is to support affordability and accessibility for essential products and services deemed important by the government.
Zero-rated VAT applies a 0% rate to specific goods and services, including most foods, children’s clothing, books, and newspapers. Although these items are taxable and must be reported for VAT purposes, no VAT is added for the end consumer. This ensures that essential everyday goods remain affordable, while still allowing businesses to reclaim VAT on related inputs.
What are exempt supplies? How does this compare to zero rated supplies?
These are certain goods and services where VAT isn't chargeable at the standard rate, or the zero rate. The tax isn't levied. Examples of VAT exempt supplies include:
Exempt supplies don't form part of your taxable turnover whereas zero rated supplies do. You can reclaim the VAT on any purchases for zero-rated goods or services; however that's not the case for exempt supplies.
Partial exemption comes into effect when your business makes a combination of both VATable and exempt sales. This could if you have a property business that lets commercial units and residential dwellings.
VAT can only be reclaimed on costs directly related to generating VATable sales as well as a proportion of certain overheads (business expenses that don't directly contribute to the production of goods or services). Partial exemption often requires a calculation at the end of each VAT period followed by an annual adjustment. It's often complex and we'd advise seeking professional advice in such instances.
You can reclaim VAT on goods and services that were purchased wholly and exclusively for business use. This is provided the supplier is VAT registered and that you also have a valid VAT invoice. office supplies, Things such as IT equipment, office supplies, accounting services, and transport costs can all qualify if only for business purposes. Specific exemptions include:
Where you have purchases with a mixed use element or employee expenses then it can be easy to make mistakes. You need to review claims carefully, keep records as evidence, and potentially seek advice to stay compliant.
You can benefit potentially from the different VAT schemes available. It all depends on your commercial circumstances, needs, and eligibility. Each scheme comes with its own regulatory and reporting requirements which you can find out more about by clicking on the links below.
The different VAT schemes include:
The most appropriate scheme for your business depends on its trading pattern. For example, if your business typically incurs more VAT on purchases than it collects on sales, you might find it advantageous to select a scheme that allows for more frequent VAT submissions. This enables you to reclaim VAT more quickly and therefore better manage your cash flow.
Taxable persons must submit a VAT return (Form VAT100) for each VAT period, this is typically every 3 months. Submissions every month however, are allowed. VAT periods are staggered into three groups for administrative convenience.
Returns have to be submitted online and any VAT due is paid electronically within one month and seven days after the period ends. You can find out more about how to pay your VAT bill here.
If your annual turnover is greater than £90,000 then you need to adopt compatible, online accounting software systems. Doing this ensures you register for HMRC's online portal, to then submit your income and expenditure figures to the quarterly deadlines whilst also paying any VAT liability due.
From April 2026 MTD is expected to be rolled out to all VAT-registered businesses given it will also be applied to Income Tax for Self Assessment. This means operating through desktop software or spreadsheets (that don't have digital links to HMRC's portal) will no longer suffice. It's really important to start preparing now.
Since the UK officially exited the EU and from January 2021, VAT on goods moving between the UK and EU operates under different, specific rules. Import VAT now applies to most goods brought into the UK, but you may be able to use a mechanism known as postponed import VAT accounting to help manage your cash flow.
For businesses exporting goods or services to the EU, the place of supply rules, registrations, and reporting requirements are different from pre-Brexit practice. Be sure therefore to seek advice prior to expanding into cross-border export activity.
Mistakes do happen, we are human after all. However, HMRC will expect prompt corrections. If you've made a small error (say below £10,000 net value) then that may be able to be adjusted on your next return.
Larger errors need to be disclosed to HMRC directly via the form VAT652. Doing so promptly reduces the risk of potential penalties, so be sure to report it the moment you identify an issue.
VAT records make up your VAT account and this provides a summary of your totals for your output VAT and input VAT.
You must keep business and accounting records for up to 6 years. This consists of VAT accounts, copies of VAT invoices and credit notes, and documentation related to imports, exports, and acquisitions from the day you register for VAT.
VAT is due based at the tax point (see earlier question). When an invoice is issued within 14 days of the date that the goods and/or services were supplied then the invoice date can be applied as the tax point for VAT purposes. Where an invoice is issued after 14 days from the date of supply then the supply date itself can be applied as the tax point.
Unfortunately VAT applies even if the debt remains unpaid. However, VAT can subsequently be reclaimed on written-off debts after a period of 6 months from the due date. This means you have to pay the VAT due over to HMRC and then write that debt off through your accounts.
As an alternative, you could operate through the cash accounting system as a means of avoiding making payment of VAT on bad debts.
Managing VAT correctly is crucial to avoid interest and penalties. This is what you need to be aware of:
For advice and pro-active VAT support, be sure to speak to one of our advisors. We can help simplify the compliance process so that you can focus on building your business.
The content of this post was created on 21/08/2025.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.