VAT is a tax charged on most goods and services provided by VAT registered businesses. There are three rates of VAT: Standard rate – 20%, Reduced rate 5% (typically on domestic utility bills), and 0% (typically on food, books and children’s clothing).

Some services are exempt or outside the scope of VAT. Exempt services typically include insurance and financial services, membership subscriptions and education services. Those outside the scope of VAT typically include those levied by statute e.g. congestion charge fees or vehicle MOT fees.

Do I need to register for VAT?

If your turnover of VAT taxable goods and services supplied within the UK for the previous 12 months is more than the current registration threshold of £81,000, or you expect it to go over that figure in the next 30 days alone, you must register for VAT.

If you are not over this threshold, then you may opt to make a voluntary registration. The advantage to this, is that you’ll be able to recover any VAT that your business suffers. However the downside, is that you’ll then have to then make quarterly VAT returns and keep all the paperwork.

Accounting schemes for VAT

There are a number of HMRC schemes to make accounting for your VAT easier. These include the Annual Accounting Scheme whereby you only file one VAT return at the end of the year, but you have to pay monthly VAT payments based on your previous year’s VAT liability. There is also the Flat Rate Scheme whereby you don’t have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your turnover as VAT.

Use cloud accounting

If you use a cloud-based accounting solution, such as Xero, then all the transactions are classified as they occur, meaning its relatively simple to prepare your quarterly VAT return. It’s worthwhile getting your accountant to check the transactions though, just to ensure that the return is good to go each month. This can then be filed electronically.

VAT pitfalls

Based on our work with small businesses, here are the things they most often get wrong with VAT:

  • Reclaiming VAT on their purchases which never had VAT on them. One that almost always crops up is insurance – where companies assume Insurance Premium Tax (IPT) is VAT which can be reclaimed. It isn’t.
  • Reclaiming VAT on business entertaining. This is specifically prohibited. Although you can reclaim VAT on employee entertaining – in certain circumstances. But one which often trips up small business owners, is that while they are employees of their own business, you cannot reclaim the VAT on entertainment where the directors are the sole employees being entertained.
  • Preparing their VAT return from their bank statements. This one is potentially a big issue. We have come across clients that have prepared their VAT returns from the bank statements, assuming all their payments out have VAT on them to be reclaimed. But this is often not the case: Business rates, insurance, public transport and airplane tickets, for example, do not have VAT on them, so by drafting their return solely by using bank statements their filings include a claim for repayment of VAT that has never been charged by the supplier.