If you've recently started a business or your turnover is growing, you may be wondering if VAT is something you need to worry about. The answer is: possibly. Here’s a quick, no-nonsense guide to help you understand what VAT is, when it applies, and how to manage it properly.

What is VAT?

VAT stands for Value Added Tax. It’s a tax added to most goods and services sold in the UK. If your business is registered for VAT, you must charge VAT on your sales and can reclaim VAT on your eligible business purchases.

When do you need to register for VAT?

You must register for VAT if your turnover exceeds £90,000 in any rolling 12-month period, not just in a single financial year, as many people wrongly assume. You also need to register if you think it is likely that your turnover will exceed the threshold in the next 30 days.

To avoid penalties, you must register within 30 days of reaching the threshold. So it pays to keep a close eye on your turnover.

What are the different VAT schemes?

You’ll need to choose the right VAT scheme for your business. The different schemes are:

• Standard Scheme – this is the default method for VAT registration in the UK and applies to most business types. You must charge VAT on your goods and services, submit quarterly VAT returns and pay or reclaim any VAT owed each quarter.
• Flat Rate Scheme – is aimed at small businesses with a turnover of £150,000 or less. The VAT you owe is a percentage of your gross turnover. This percentage is based on the type of business. HMRC publish the rates for different business types here.
• Annual Accounting Scheme – you only submit one VAT return a year and can pay monthly or quarterly instalments towards your VAT bill throughout the year, based on your last VAT return. This is estimated if you are in your first VAT year.
• Cash Accounting Scheme – you pay VAT on your sales when your customer or client pays you and reclaim the VAT on purchases when you pay your suppliers.

To join either the Annual Accounting or Cash Accounting VAT Schemes, your turnover must be £1.35 million or lower.

If you’re a retail business or selling second-hand goods, you may be able to use the VAT Margin Scheme or one of the VAT retail schemes.

It is important to select the VAT scheme that best suits your business, as this will determine how and when you pay VAT. It's worth getting advice from a qualified and experienced accountancy firm like JRMA.

How much VAT do you charge?

There are three rates of VAT:

• Standard rate – 20% - which applies to most goods and services.
• Reduced rate – 5% - which only applies to some services, for example, home energy and children's car seats.
• Zero rate – 0% - which applies to most food and children's clothing. However, you also can’t reclaim VAT on related costs.

What happens once you're registered?

Once VAT registered, you:

• Must charge VAT on your sales (this is referred to as output VAT).
• Can reclaim VAT on most purchases (input VAT).
• Need to file VAT returns, usually every quarter.
• Must comply with HMRC’s Making Tax Digital (MTD) for VAT scheme.

What is a VAT return?

A VAT return is a summary of the VAT you’ve charged and paid. It shows:

• VAT on sales and other outputs.
• VAT on purchases and other inputs.

You submit this to HMRC, usually on a quarterly basis, and either pay the difference or claim a refund.

Don’t forget Making Tax Digital!

Since 2022, all VAT registered businesses must comply with HMRC’s Making Tax Digital (MTD) rules. This means using MTD compatible software to keep digital records and submit your VAT returns to HMRC’s MTD for VAT portal.

Avoid common VAT mistakes

VAT isn’t difficult once you get to grips with it, but here are a few things that trip people up:

• Not registering on time.
• Charging the wrong VAT rate.
• Missing deadlines.
• Not keeping proper records.
• Forgetting about MTD requirements.

To help you avoid making VAT errors, read our blog, 9 Common VAT Mistakes and How to Avoid Them.

JRMA VAT services

At JRMA, we take the stress out of VAT. From monitoring your turnover to ensuring your VAT returns are submitted accurately and on time, we take care of the details so you can focus on your business.

If you're unsure whether you need to register or require assistance understanding how VAT applies to your business, please contact us today at 01905 796512 or email info@jrma.co.uk.