Value Added Tax for growing companies
If your business is doing well and sales are climbing, that’s great news. It also means that you may have to start thinking about registering for Value Added Tax (VAT).
This page is here to help you get to grips with what you need to know about VAT, when you need to register for it, and what it means for you and your business.
VAT in a nutshell
As the name suggests, VAT is a tax that gets added to the price of most things bought and sold in the UK. For instance, when you pick up something in a shop, VAT has usually already been added to the price.
If you run a VAT-registered business, you need to charge VAT correctly on the things you sell. You then pay this VAT to us. We’ll explain how to do this later.
When and how to register for VAT
You only need to register and start adding VAT, when you earn more than £90,000 as ‘turnover’ in any rolling 12-month period. Turnover is the money your business makes, before you pay any expenses or tax.
Here’s the best way to check if you need to register.
At the end of each month, look back at your last 12 months of sales
Add all the figures together
If the total is over £90,000, you must register within 30 days of the end of the month in which you went above the limit
Helpful tip:
You need to register for VAT within 30 days of reaching the £90,000 turnover limit. So, if it’s looking like you’ll earn more than this in the next 30 days, you should register now.
Once you register your business with us for VAT on GOV.UK, we’ll send you a VAT registration number (VRN). After you get your VRN, you need to start adding VAT onto the price of any goods or services you sell. We’ll explain how to do this later on.
Here’s an example of when to register for VAT
On 1 May, Company E signs a big contract with a car company
The company realises that this will push their turnover above £90,000 before the end of the month
They need to register for VAT by 30 May. They’ll need to pay VAT from 1 May
There are different VAT rates
VAT is charged at the standard rate of 20% on most products (also called goods) and services. This covers things like:
- electronics
- furniture
- phone bills
- work done by accountants and solicitors
Other things – like home energy bills, children’s car seats, and some energy-saving products for your home – have a lower VAT rate of 5%.
And some items have no VAT at all. This includes most food, children’s clothes, and books. Even though these are taxed at 0%, if you sell them, they still count towards the £90,000 turnover limit we talked about earlier.
For example, if you run a bookshop that makes £95,000 a year, you still need to be VAT-registered.
Adding VAT to your prices
Once you’re VAT-registered, you’ll need to add VAT to your prices.
Step 1: You need to start adding VAT onto the price of any products or services you sell. For example, if you sell things that fall under the standard rate of 20% VAT, you’ll need to add that onto the prices you’re charging*
Step 2: Keep hold of the extra 20% you get paid, as you’ll need to pay this to us in tax when you do your VAT return
Step 3: You must clearly split out the cost of your products or services – with the VAT shown separately – on any invoices or receipts. You’ll also need to include the VAT registration number we mentioned earlier
*As we mentioned above, some goods and services have different VAT rates.
Some companies get a bit worried about putting their prices up by 20%, so they might soften the hit to customers by cutting the base price of their products and services. Others are more comfortable about the increase.
There’s no right or wrong here, it all depends on your business and your customers.
Sending us your VAT return
A VAT return is a type of tax return you’ll need to do if you’re a VAT-registered business. It helps us work out if you’ve paid too little or too much VAT.
On your VAT return, you’ll need to tell us the VAT owed on the full value of any product or service you sell.
Most companies need to send us a VAT return every 3 months, but there are some who might do a monthly or just a single yearly return. You can find out more about when to send a VAT return on GOV.UK.
Your return needs to show us how much VAT you’ve charged your customers and how much VAT you’ve paid when buying things to run your business (your expenses).
Key thing to remember:
You can claim back VAT on things or services you buy to run your business. So, if you’ve paid more VAT on your business expenses than the VAT you’ve charged customers, we’ll refund you the difference.
But if you’ve paid more VAT on buying things for your business than the VAT you’ve charged your customers, we’ll usually pay you back.
Key thing to remember:
You need to send us your VAT return and pay any tax you owe no later than 1 month and 7 days after your VAT period ends. If you don’t, you may be charged a penalty.
So, if your VAT period ends on 31 March, the deadline would be 7 May.
Helpful tip:
Keeping a record of all the VAT you charge your customers and pay your suppliers is very important, so it’s a good idea to make sure your invoices and receipts are well organised and easy to find.
Check out our How to do a VAT return page to learn how to fill out yours.
You can register early if you want
Some businesses choose to register for VAT even if their turnover is below £90,000.
Here are two good reasons why you might do this:
If you spend a lot of money buying things for your business, you can claim back the VAT
It can make your business look more solid and professional
Key thing to remember:
If your turnover drops below £88,000 at any point, you can ask us to cancel your VAT registration, which means you’d stop charging VAT and sending us VAT returns.
Making things simpler for you
We have different VAT schemes to help smaller businesses. For example, our Flat Rate Scheme lets you pay a fixed percentage of your turnover as VAT, which means a lot less paperwork.
Our schemes are worth looking at, but they won’t be right for everyone – it all comes down to your type of business and how it works. You can find out more about VAT schemes on GOV.UK.
Getting help when you need it
VAT can feel like a lot to take in at first. But once you understand the basics and get into the rhythm of things, it’ll soon become part of your regular business routine.
If you’re not sure about things, an accountant can help you set up your VAT. And don’t forget, you can always find further VAT guidance on GOV.UK.