VAT (Value Added Tax) is a consumption tax charged on most goods and services supplied in the UK, currently at a standard rate of 20%, with reduced and zero rates applying to certain items. Businesses with taxable turnover above the VAT registration threshold must register with HMRC, charge VAT on their sales, and submit regular VAT returns.
What is VAT and who needs to register?
Value Added Tax (VAT) is a consumption tax charged on most goods and services supplied in the UK. If you run a business, you may need to charge VAT on your sales, reclaim VAT on your purchases, and submit regular returns to HMRC.
You must register for VAT if your taxable turnover goes over the VAT registration threshold of £90,000 in any rolling 12-month period, or if you expect it to go over £90,000 in the next 30 days alone. Some businesses choose to register voluntarily, even if they're below the threshold, so they can reclaim VAT on business expenses. See VAT registration threshold.
Heads up - Once registered, you must account for VAT on your sales from your effective date of registration. You cannot show VAT on your invoices until you get your VAT registration number, but you can increase your prices to cover the VAT you'll have to pay to HMRC, then reissue the invoices showing the VAT once the number arrives.
VAT rates
The rate you charge depends on the goods or services you supply:
- Standard rate – 20%. Applies to most goods and services.
- Reduced rate – 5%. Applies to certain supplies such as children's car seats and domestic fuel and power.
- Zero rate – Applies to items like most food, books and children's clothing. VAT is charged at 0% but the sale is still reportable. See Zero-rated.
- Exempt – Certain supplies, such as some financial services, insurance and education. No VAT is charged and these sales don't count towards taxable turnover. See VAT exempt.
- Outside the scope – Transactions that fall entirely outside UK VAT rules.
Heads up - Zero-rated and exempt are not the same. Zero-rated sales let you reclaim related input VAT; exempt sales generally do not. If you're unsure which applies, check with your accountant or HMRC guidance.
Charging and reclaiming VAT
The VAT you charge on your sales is your output tax. The VAT you pay on purchases for the business is your input tax. On each return you pay HMRC the difference, or HMRC repays you if your input tax is the larger figure.
- Your VAT registration number must be shown on every invoice you raise.
- You need a valid VAT invoice from the supplier to reclaim input tax.
- You cannot reclaim VAT on business entertainment, or on purchases used to make exempt supplies (subject to the partial exemption rules).
Choosing a VAT scheme
The right choice depends on your turnover, cash flow and the type of supplies you make.
- Standard (accrual) VAT – VAT is accounted for based on invoice dates, regardless of whether payment has been received.
- Cash accounting – VAT is accounted for when money actually changes hands. Useful if customers pay slowly.
- Flat Rate Scheme – You pay a fixed percentage of your gross turnover to HMRC and generally cannot reclaim VAT on most purchases. See Flat Rate Scheme.
- Annual Accounting – You submit one return per year with interim payments on account.
- Margin schemes – Used for second-hand goods, art, antiques and collectables.
In Tax Optimiser you record your VAT scheme next to your VAT registration number under Organisation → Tax & VAT; most businesses are on Standard. Whichever scheme you use, the figures for your return are worked out in your own records.
VAT returns and Making Tax Digital
Once registered you send HMRC a VAT Return, usually every three months. The deadline for sending the return and for paying HMRC is usually one calendar month and seven days after the end of the period.
VAT-registered businesses must comply with Making Tax Digital (MTD) rules: you keep your VAT records digitally and send your returns using compatible software. You do not need to sign up, because HMRC signs up VAT-registered businesses automatically unless they are exempt.
Sending your VAT return with Tax Optimiser
Tax Optimiser is bridging software for Making Tax Digital for VAT. You keep your VAT records in your own spreadsheet or accounting system, and Tax Optimiser reads the nine boxes of the return from the spreadsheet you upload and sends them to HMRC. Your sales invoices, purchases and VAT rates stay in your own records.
- Enable the VAT service from the VAT card on your dashboard and enter your VAT registration number under Organisation → Tax & VAT.
- Map your spreadsheet once in VAT Settings: the sheet name and the cell that holds each of the nine boxes.
- Connect to HMRC with your Government Gateway sign-in details. Your VAT periods then come straight from HMRC.
- Each period, upload the spreadsheet, check the nine boxes and send the return.
- Keep HMRC's confirmation receipt, which is stored with the return.
The full walk-through starts at VAT: getting started.
Checking your figures before you file
Before submitting, we recommend running through these checks in your own records:
- Have all sales invoices for the period been raised?
- Have all supplier bills and expenses been entered with the correct VAT rate?
- Do the nine boxes shown in Tax Optimiser after the upload match your spreadsheet?
Tip: The nine boxes in Tax Optimiser are read-only. If a figure is wrong, correct your spreadsheet and upload it again.
Paying VAT to HMRC
You pay any VAT due directly to HMRC by the deadline for the return. In Tax Optimiser, the Liabilities and Payments tabs on the VAT Returns screen show what HMRC says you owe and the payments it has received. See Liabilities, payments and the quarterly cycle.
Heads up - Late VAT returns or payments can trigger HMRC penalties and interest. The VAT card on your Tax Optimiser dashboard shows your next return and its filing deadline.
Correcting errors on past returns
If you spot a mistake on a return you've already filed, the way you correct it depends on the size and nature of the error. You can correct it on your next return if the net value of the errors is £10,000 or less, or between £10,000 and £50,000 and no more than 1% of the box 6 figure on that return. Larger errors, and any deliberate ones, must be reported separately to HMRC.
In Tax Optimiser the nine boxes are read from your spreadsheet, so the correction is made in the spreadsheet for your next return. For more detail, see Amending a VAT return after it has been sent.
Deregistering for VAT
If your taxable turnover falls below the deregistration threshold of £88,000, you can ask HMRC to cancel your registration. If you stop making taxable supplies, you must cancel within 30 days. HMRC confirms your cancellation date: you must stop charging VAT from that date and submit a final VAT Return for the period up to and including it.
Once your registration is cancelled you cannot send returns with Making Tax Digital software. HMRC asks you to send any remaining return from your VAT online account.
Need more help?
If you're unsure which VAT rate applies to a specific supply, or whether you should register, we recommend speaking to a qualified accountant. You can also read HMRC's guidance on registering for VAT and on VAT rates on different goods and services, or email our support team at support@taxoptimiser.co.uk.