The essential guide to VAT

It’s no secret that small business owners need to navigate their way through various pieces of tax legislation – and VAT is no exception.

While it may seem like a pain to understand, getting it right could save you a lot of hassle and avoid potential fines if you don’t comply with your obligations. To help, we’ve put together this handy guide.

What is VAT?

VAT (or Value Added Tax to use its full name) is levied on the sale of goods or services by UK businesses. A company then pays tax to HMRC by calculating how much VAT they have charged customers compared to the amount they have paid on their own purchases.

As a business, you’re legally required to register for VAT as soon as your annual turnover reaches £82,000. You can always sign up before you get to this amount if you want – something that’s particularly useful if the majority of your transactions are with VAT-registered companies.

Once you’re registered, you can charge customers an additional 20% on all goods and services you provide – known as an ‘output tax’. For example, a product that costs £300 could actually be sold for £360 once VAT is added on.

If you make purchases from a VAT-registered seller, you’ll be charged a 20% mark up as well, known as input tax. At the end of every quarter, you’ll have to calculate how much output tax you have received and subtract the amount of input tax you have paid. The remaining amount is then sent to HMRC.

Are there other rates?

Put simply – yes. As long as your VAT-exclusive turnover is below £150,000 you can register for a flat-rate scheme. This means that you’ll only pay a fixed percentage of VAT receipts to HMRC, rather than having to work out the difference between your output and input amounts.

The rate you’ll pay depends on your business type, while there’s also a further reduction of 1% if you’re in your first year as a VAT-registered company. This discount is in place until the day before your registration anniversary.

Here’s a quick rundown of a few business types and the amount of VAT you’ll need to pay.

The essential guide to VAT

For a more detailed list, please visit the HMRC website.

Should I apply for the flat rate scheme?

As with most things in life, there is no one-size-fits-all solution. That is certainly the case when it comes to deciding which VAT rate to use.

If your business makes lots of purchases, you’d be better off using the standard rate, while the flat rate system would be more suitable if you only buy the odd thing here and there. Here’s a quick example to illustrate what we mean:

  1. You are an IT consultancy company with an input tax of £20,000 and an output tax of £19,000. You’ve been VAT-registered for two years.Standard rate: £20,000 – £19,000 = £1,000
    Flat rate: £20,000 x 14.5% = £2,900
  2. You are an IT consultancy company with an input tax of £20,000 and an output tax of £3,000. You’ve been VAT-registered for two years.Standard rate: £20,000 – £3,000 = £17,000
    Flat rate: £20,000 x 14.5% = £2,900

As we can see from the example above, you’d only benefit from the flat rate scheme if your output tax is significantly lower than the amount you receive from customers.

What if I pay more than I receive?

If your output tax is greater than your input tax, you’ll receive a refund from HMRC. This equates to the amount of VAT you’ve overpaid.

Any repayments due usually take place within 10 working days of HMRC receiving your VAT return and go direct to your bank account. Compensation (called a ‘repayment supplement’) might be payable if you don’t receive your money after 30 days. This amounts to 5% of your repayment value of £50, whichever is higher.

However, you won’t be entitled to anything if:

  • Your VAT returns have been late
  • You made errors on your return that reduce your claim by £250 or 5% (whichever is higher)
  • You have missed previous deadlines and your returns are still outstanding

Want to know more?

We hope this guide has helped shed some light on VAT. If you’d like a bit more information, look no further than ClearSky Business.

We’re the experts when it comes to tax and our dedicated team of experts will be with you all the way, no matter when you need us.

Not only are we up to speed with the latest regulations, we’ll also help you at each stage of the VAT process. We offer proactive advice about charging VAT and assist with registration and we’ll even calculate and submit your returns on your behalf – so you don’t need to.

With ClearSky, you’ll be getting the complete package of expert tax and accounting advice, plus a robust payroll solution. This means you can take care of your responsibilities in one place, leaving you free to concentrate on your business.

For more information about what we can do for you, or to join up, please call 08000 149 597 or email

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