UK VAT rules cover all structures of business, so if you're a sole trader, limited company, partnership, limited liability partnership etc VAT rules will be applicable to you.
It's compulsory to register your business for VAT with HMRC if your VAT taxable turnover exceeds £85,000 in a 12 month period. (VAT Taxable turnover is the total of everything you sell that isn't exempt for VAT.)
HMRC also require you to register for VAT if you expect to exceed the £85,000 turnover threshold within 30 days.
HMRC have produced a helpful video explaining if you should charge VAT or not.
What does being registered for VAT actually mean?
In the UK VAT is charged on most things that are sold. There are of course things on which VAT isn't charged. This includes some food, medicine, insurance, children's clothing etc. The current rate of VAT in the UK is 20%.
If you are VAT registered, you will need to:
- charge VAT of on your business' sales of relevant goods
- claim VAT back on the costs of goods and services that have been purchased wholly and exclusively for the use of the business.
Normally every quarter (although annual returns can be submitted in some cases) your business will submit it's VAT return to HMRC.
Detailed on the VAT return is the total of VAT you have charged less the VAT you are reclaiming. This results in either a balance that has to be paid over to HMRC or a refund of VAT which will be repaid back to your business.
There are strict rules as to when returns need to be submitted and payments made. If these are missed then penalties & interest can be imposed.
If you register for VAT your business will need to keep very good accounting records. HMRC can send their representatives to check your VAT records to ensure that all is in order. Additional VAT could be due if they find you have incorrectly claim VAT on purchase or you have purchase invoices missing.
We recommend that businesses use online accounting software such as QuickBooks or FreeAgent to maintain their accounting records. Such software makes tracking, preparing and submitting VAT so much easier. Also HMRC are introducing 'Making Tax Digital' from April 2019 where VAT registered business will need to submit their accounts quarterly using compliant online software, such QuickBooks or FreeAgent. HMRC will not be providing free software.
There are a number of VAT schemes that small businesses can opt to join. They are designed to reduce the administrative burden and aid the cash flow of small businesses. These schemes include the Flat Rate Scheme, Cash Accounting Scheme and Annual Accounting Scheme.
Help with your VAT
Zest's 'Boosted' & 'Complete' small business accountancy packages include the preparation of VAT returns. Prices start from £35.00 plus VAT for Sole Traders and £75.00 plus VAT for Limited Companies. Prices include end of year accounts and tax returns as applicable.
This guide is a short brief introduction to VAT in the UK. It is in no way comprehensive advice as to wether or not your company should register for VAT. For full details on registering for VAT, dealing with VAT returns, VAT schemes and VAT rules, please visit HMRC. A link to their VAT pages is here.