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If the revenue of your UK based business reaches £85,000 in any 12-month period, you’re legally required to register for Value-Added Tax (VAT). You can also voluntarily register prior to reaching this threshold if you see it as a benefit to your business. Here’s everything you need to know.
What is UK VAT?
VAT is a UK tax collected by some businesses on goods and services they sell and paid directly to the UK government. The standard rate charged is 20% of the base value of the goods or services being sold. In some rare cases, such as home energy, a reduced rate may be applied, which can you find more information on by visiting the VAT rates page.
VAT can only be collected by businesses who are registered for VAT, and these same businesses can also reclaim the VAT they pay out for business expenses. When and how VAT is charged and reclaimed depends on various scenarios, such as whether a business is selling to a consumer, or if one business is registered for VAT but another isn't. Below are some common instances of when VAT would be due for businesses operating solely in the UK:
Business to business
- Business 1 is not registered for VAT, and they're paying Business 2 who is VAT registered for a service. Business 2 will charge their rate plus the VAT charge, which Business 1 must pay but cannot claim back during their accounting.
- Business 1 is registered for VAT, and they're purchasing equipment from Business 2 who is also VAT registered. Business 1 will have to pay an additional VAT charge, but they'll be able to claim this amount back.
- Business 1 is registered for VAT, and they're paying Business 2 for a service who is not VAT registered. No VAT will be charged from Business 2, therefore Business 1 will have no VAT to reclaim.
Business to consumer
- Business 1 is not VAT registered and they're selling products online to consumers. The consumer will only pay the standard price, and Business 1 cannot charge VAT on the goods they sell.
- Business 1 is VAT registered and they’re selling goods to consumers. The consumer will pay the standard price plus an additional VAT charge. The consumer cannot reclaim the VAT charge, and Business 1 will pay the collected VAT directly to the UK government.
If you’re dealing with individuals or businesses outside of the UK, when and how you charge for VAT may vary
When do you have to register for VAT?
If your business turnover is £85,000 or greater in any 12-month period, you are legally obliged to register for VAT. You have 30 days to register from the date you reach this threshold.
If you reach the VAT registration threshold but believe this is only temporary, you may be able to apply for an exception.
What if my turnover is under the threshold?
If your business does not turnover £85,000 or more in any 12-month period, then you do not have to register or charge VAT on your goods and services. Most commonly, this will apply to smaller businesses such as sole traders and newly registered companies. However, you have the option to voluntarily register for VAT at any time if it would be more advantageous to your company.
Will registering for VAT benefit your business?
UK VAT should not necessarily be considered as a benefit or drawback to your business. It is a tax law in the UK that should be taken into account when structuring your business and pricing your services. If you're considering registering voluntarily while under the threshold, here are some of the main points to consider:
- If you’re VAT registered, it can make your company appear larger and more professional when dealing with other businesses.
- You may find that your finances are improved due to the amount of VAT you can reclaim on your expenses.
- You can reclaim the VAT paid to companies that are charging you VAT.
- You're future-proofing your business and can structure VAT prices into your business plan rather than having to reconsider this at a later date.
- Increased administrative and accounting duties, which will often come with higher costs.
- If you do not structure this into your pricing prior to registering, then the pricing of your products and services will become more expensive, which can be particularly damaging for price-competitive businesses such as e-retail companies.
- You’ll need an understanding of how paying out and reclaiming VAT is going to affect your cash flow on a month-by-month basis.
How to register for VAT
You can register for VAT online using the online government gateway, where you'll need to create an account that can be used to manage many UK government services relating to your business. If you've registered your business in the UK, then it's likely that you'll already have a government login portal that you had to create when signing up.
You also have the option to use an agent to register on your behalf, such as using the accountant who will be handling your VAT returns.
How do you charge VAT?
It must be clear that you're charging VAT and how much this amounts to on all sales and invoices. For example, if you're an e-retailer selling products online, customers should be shown at checkout that they're being charged VAT and what this amounts to.
UK business registration
If you’re registering your business in the UK, regardless of whether you’re ready to opt in to VAT payments, you’ll be required to provide a UK based correspondence address which will be available for public viewing.
Incorporating your business and registering for VAT often go hand-in-hand, as both demonstrate that you’re operating a large UK company. If you’re in need of an address to use throughout this process that will protect the privacy of your home address, or provide you with a UK based address you otherwise do not have, then you may find that our virtual address service provides you with a suitable correspondence address to use.