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How VAT works
What is VAT?
VAT (Value Added Tax) is a tax added to most products and services sold by VAT- registered businesses. Businesses have to register for VAT if their VAT taxable turnover is more than £90,000. You can also choose to register if their turnover is less than £90,000 (2024-25).
01
Your responsibilities as a VAT-registered business:
As a VAT-registered business you must:
- Include VAT in the price of all goods and services at the correct rate
- Keep records of how much VAT you pay for things you buy for your business
- Account for VAT on any goods you import into the UK
- Report the amount of VAT you charged your customers and the amount of VAT y You paid to other businesses by sending a VAT return to HM Revenue and Customs (HMRC) - usually every 3 months
- Pay any VAT you owe to HMRC
The VAT you pay is usually the difference between any VAT you’ve paid to other businesses, and the VAT you’ve charged your customers.
If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, HMRC will usually repay you the difference.
02.
What VAT is charged on?
- Goods and services
- Hiring or loaning goods to someone
- Selling business assets
- Commission
- Items sold to staff - for example canteen meals
- Business goods used for personal reasons
- ‘Non-sales’ like bartering, part-exchange and gifts
These are known as ‘taxable supplies’. There are different rules for charities.
VAT is not charged on goods or services that are exempt from VAT or are unaffected by VAT.
03.
How much VAT you must charge?
There are 3 different rates of VAT that can be added to products. Which one applies depends on the goods and services, and how they’re used.
Most goods and services are charged at the standard rate of 20%. You should charge this rate unless the goods or services are classed as reduced or zero-rated.
| Standard Rate | 20% | Most goods and services |
| Reduced Rate | 5% | Some goods and services, eg children’s car seats and home Energy |
| Zero Rate | 0% | Zero-rated goods and services, eg most food and children’s clothes |
| Exempt | Exempt | Postage stamps, financial and property transactions. |
- What items are Zero Rated VAT?
- Books and newspapers
- Children’s clothes and shoes
- Motorcycle helmets
- Most goods you export from England, Wales and Scotland (Great Britain) to a country outside the UK
- Most goods you export from Northern Ireland to a country outside the EU and the UK
- Goods you supply from Northern Ireland to a VAT-registered EU business – you can check if the VAT number is valid
04.
VAT thresholds:
You need to register for VAT if you go over or expect to go over the registration threshold.
Use your taxable turnover to work out if you’re over a threshold. This is the total value of everything you sell or supply that is not exempt.
| Circumstance: | Threshold: |
|---|---|
| Register for VAT | More than £90,000 |
| Register for distance selling into Northern Ireland | More than £8,818 |
| Register to bring goods into Northern Ireland from the EU | More than £90,000 |
| Complete a simplified EC Sales List | £106,500 or less and supplies to EU countries of £11,000 or less. |
| Cancel your VAT registration | Less than £83,000 |
VAT Accounting Scheme thresholds:
| Schemes: | Threshold to join scheme | Threshold to leave scheme |
|---|---|---|
| Flat Rate Scheme | £150,000 or less | More than £230,000 |
| Cash Accounting Scheme | £1.35 million or less | More than £1.6 million |
| Annual Accounting Scheme | £1.35 million or less | More than £1.6 million |
When do I have to cancel the VAT registration?
You must cancel your registration if you’re no longer eligible to be VAT registered.
It must be done within 30 days if you stop being eligible or you might be charged a penalty.
For example:
- You stop trading or making VAT taxable supplies
- You join a VAT group
If your taxable turnover falls below £88,000 you can ask HM Revenue and Customs (HMRC) to cancel your registration, unless all of the following are true:
- You and your business are based outside the UK
- You supply any goods or services to the UK (or expect to in the next 30 days)
How to Cancel VAT Registration?
To cancel your VAT registration online, you’ll need your Government Gateway user ID and password. You can cancel your VAT registration online if:
- You’ve stopped trading and you’re not part of a VAT group
- Your taxable turnover is below £88,000
- You’ve stopped making VAT taxable goods or services
- You’re applying for an exemption if most or all of what you sell is VAT zero-rated
You must cancel by post if:
- Your legal status has changed and you want a new VAT registration number
- You’ve sold your business and the owner is not keeping the VAT registration number
- Your VAT group is closing (‘disbanding’) - you’ll also need to complete a VAT50-51 form and send both forms together to HMRC
- Your business stopped trading after liquidation
Cancel your registration by post using form VAT7.
You’ll need to fill in the form fully before you can print it. You cannot save a partly completed form. Print and send your completed VAT7 form with any other completed forms to HMRC. The address to send it to is in the form.
Seek Professional Advice
Dealing with VAT can be tricky and prone to errors. From charging the right rates to keeping accurate records and filing returns on time, staying on top of your VAT obligations is crucial for compliance and growth.
At Tx Accountants Ltd, we’re here to make the process easier for you. When you work with us, we’ll ensure your VAT returns are spot-on and help you minimize your VAT bill, saving you both time and money. Our friendly team will guide you through VAT registration, explain everything clearly, and offer practical advice to help you stay compliant without the stress.
For personalized support with your VAT and accurate VAT returns, reach out to us at info@txaccountants.co.uk. Let us take the hassle out of VAT, so you can focus on growing your business!
Author...
Farhad Kabir
MSc AFA MIPA FCCA
Partner
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