VAT (Value Added Tax) is a tax on goods and services that’s collected by businesses on behalf of the government. As a small business owner, you’ll need to know what this looks like for you, including how to register and what VAT covers, as this will affect your profit margins.
Read on as we uncover what you need to know.
What is VAT for small businesses?
VAT (Value Added Tax) is a tax that many small businesses collect on behalf of the government when they sell goods or services. If your business is VAT registered, you’ll usually add VAT to your prices, collect it from customers, and pay it to the UK Government after deducting any VAT you’ve paid on any eligible business expenses.
| Top Tip: You will charge VAT on eligible sales, reclaim VAT on eligible business purchases, and pay (or reclaim) the difference when you submit your VAT Return. |
When does a small business have to register for VAT?
In the UK, you must register if your VAT-taxable turnover exceeds £90,000 in a rolling 12 month period. You can also register voluntarily if your turnover is below this threshold (which is helpful in case the threshold is exceeded).
Can I register for VAT if my turnover is below the threshold?
Yes! Many small businesses voluntarily register to reclaim VAT on purchases or because their customers are mostly VAT-registered businesses that can reclaim the VAT anyway.
How do I calculate the VAT I owe?
Add the VAT you’ve charged customers (output VAT) together and take away the VAT you’ve paid on eligible business expenses (input VAT). The difference is what you pay or reclaim from HMRC.
How does VAT work for small businesses?
- Register for VAT
- If your annual sales exceed the threshold amount, you must register for VAT.
- Some businesses can choose to register voluntarily even if they’re below the threshold.
2. You’ll charge VAT on sales (output VAT)
- When you sell a product or service, you add VAT to your price. In the UK, this is usually 20%, though this can be a reduced rate at 5% for certain items.
3. Pay VAT on business purchases (input VAT)
- When you buy supplies or equipment, you’ll likely pay VAT to your suppliers.
- Submit VAT returns
- Quarterly, you will need to report:
- VAT you’ve collected from customers (output VAT)
- VAT you’ve paid on business expenses (input VAT)
- Pay or reclaim the difference
- If you collected more VAT than you paid, you send the difference to the tax authority.
- If you paid more VAT than you collected, you may receive a refund.
Want to know more about applying for VAT as a business growth strategy? Contact one of our experts for a free consultation.
Do all small businesses charge 20% VAT?
No – the standard UK VAT rate is 20%, but some goods and services are charged at 5%, some are zero-rated (0%), and others are VAT exempt. The correct rate depends on what you’re selling.
What happens if I don’t register for VAT when I should?
If you exceed the registration threshold and fail to register on time, HMRC may require you to pay the VAT you should have collected and could also charge penalties and interest.
How often do I submit a VAT Return?
Most VAT-registered businesses submit VAT Returns every three months using Making Tax Digital-compatible software.
What is the Flat Rate VAT Scheme, and is it worth it?
The Flat Rate Scheme is designed to simplify VAT accounting for some smaller businesses. Instead of reclaiming VAT on most purchases, you pay HMRC a fixed percentage of your VAT-inclusive turnover.
Whether it’s worthwhile depends on your industry and expenses. Our team of accountants can help with this – contact us here.
Can I reclaim VAT on business expenses?
Yes, you can reclaim VAT on business expenses as long as you’re VAT registered and the purchases are eligible business expenses with valid VAT invoices. Some purchases have restrictions or are not reclaimable.
How can Accountancy Solutions help with tax for small businesses?
If you are unsure about your company’s profits, current tax bands, or how to keep track of your VAT receipts, speak to one of our friendly, expert accountants by getting in touch.
We hope this guide on how VAT works for small businesses was helpful! Next, find out the answer to what is a dividend with our handy article here.