What this article is about: This guide explains UK VAT from an employer and finance lead perspective, covering how VAT works, when to register and deregister, rates and schemes, invoicing and tax points, Making Tax Digital, cross-border rules, penalties (current post-Jan 2023 regime), and practical compliance controls. It reflects the £90,000 registration threshold (from 1 April 2024) and replaces the old Default Surcharge with the current late submission/late payment penalties system. It includes formulas, worked examples, and sector signposts so you can set policies, price correctly, and file accurately.
Value Added Tax (VAT) is a UK consumption tax applied to most goods and services. Businesses collect VAT on taxable sales (output VAT), offset VAT incurred on costs (input VAT), and pay/refund the net to HMRC. Good VAT management underpins pricing, margin, cash flow, and compliance. This article sets out the rules and the practical steps to stay compliant and optimise your position.
Section A: What is VAT?
VAT is a tax on consumption charged at each stage of the supply chain but borne by the final consumer. VAT-registered businesses act as tax collectors, charging VAT on taxable supplies and reclaiming VAT on business inputs used to make those supplies. The liability to register is based on UK taxable turnover, not profit, and applies on a rolling 12-month basis or where you expect to exceed the threshold in the next 30 days.
1. Inputs, outputs and the net payment to HMRC
Input VAT is VAT you incur on business purchases. Output VAT is VAT you charge on sales. You report the net (output less input) on your VAT Return. If input exceeds output, you normally claim a repayment.
- Example (manufacturer): Buys materials for £1,000 + £200 VAT (input). Sells goods for £2,000 + £400 VAT (output). Pays £200 net (£400 − £200) to HMRC.
- Example (retailer): Buys stock for £2,000 + £400 VAT (input). Sells for £3,000 + £600 VAT (output). Pays £200 net (£600 − £400) to HMRC.
Scope basics: VAT applies to taxable supplies made in the UK by a taxable person (a business required or registered for VAT) in the course or furtherance of business. Supplies may be standard-rated (20%), reduced-rated (5%), zero-rated (0%), or exempt (no VAT and generally no input recovery directly related to exempt supplies).
2. VAT-inclusive vs VAT-exclusive pricing (quick formulas)
For pricing and quoting, use these standard calculations:
- Add VAT (exclusive → inclusive): price_excl_VAT × (1 + rate). For 20%: × 1.20. For 5%: × 1.05.
- Strip VAT (inclusive → exclusive): price_incl_VAT ÷ (1 + rate). For 20%: ÷ 1.20. For 5%: ÷ 1.05.
- VAT amount from VAT-inclusive price: price_incl_VAT − (price_incl_VAT ÷ (1 + rate)).
Worked example (standard rate 20%): If the VAT-inclusive price is £120, the VAT-exclusive price is £120 ÷ 1.20 = £100, VAT = £20.
3. When VAT matters most for finance leaders
Cash flow: Payment timings, scheme choice (e.g., Cash Accounting), and Postponed VAT Accounting for imports directly affect working capital. Margins and pricing: Rate classification and VAT-inclusive retail pricing drive margin clarity. Controls: Accurate tax points, compliant VAT invoices, and digital links under MTD reduce error and penalty exposure.
What’s new/updated: Registration threshold is £90,000 (from 1 April 2024). The Default Surcharge has been replaced by the current late submission points regime and late payment penalties/interest. UK sellers into the EU cannot use the EU Union OSS; instead, register for the Non-Union OSS where relevant.
Section B: VAT Registration and Deregistration
VAT registration is a critical compliance step for UK businesses. Registration may be mandatory if you exceed the registration threshold or voluntary if you choose to register early. Businesses can also deregister where turnover falls below the deregistration threshold. Understanding these rules ensures you avoid penalties and plan cash flow and pricing with certainty.
1. Mandatory VAT registration
Businesses must register for VAT if their taxable turnover exceeds the £90,000 threshold (from 1 April 2024). Taxable turnover includes the total value of all supplies subject to standard, reduced, or zero rate VAT (not exempt supplies). The test is applied on a rolling 12-month basis, not by tax year.
There is also a 30-day future test. If you know your taxable turnover will exceed £90,000 in the next 30 days alone, you must notify HMRC and register immediately. Late registration can lead to backdated VAT liabilities, interest, and penalties.
2. Voluntary VAT registration
Even if your turnover is below £90,000, you may register voluntarily. This can be beneficial if you incur significant input VAT on purchases, if your customers are mainly VAT-registered businesses, or if you want the credibility that VAT registration may provide. However, voluntary registration brings obligations such as digital record keeping, filing VAT returns, and charging VAT on taxable sales.
3. Deregistration
You can apply to deregister for VAT if your taxable turnover falls below the deregistration threshold of £88,000. Deregistration may simplify administration but means you lose the ability to reclaim input VAT. Businesses must also account for VAT on stock and assets still on hand at the point of deregistration if their VAT value exceeds £1,000.
4. Late registration and consequences
If you fail to register when required, HMRC can:
- Backdate your registration to the correct effective date
- Require you to pay VAT on past sales from that date (even if you did not charge customers VAT at the time)
- Charge late registration penalties and interest
Businesses should monitor turnover monthly to ensure timely registration and avoid unexpected liabilities.
5. Group VAT registration
Where two or more UK companies are under common control, they can apply for group VAT registration. The group is treated as a single taxable person, with one VAT number and one return covering all members. Intra-group supplies are disregarded for VAT purposes, improving cash flow and reducing compliance complexity. However, group members are jointly and severally liable for the group’s VAT debts, so governance and internal agreements are essential.
Section summary: VAT registration becomes compulsory once turnover exceeds £90,000, but businesses below the threshold can register voluntarily. Deregistration is possible where turnover falls below £88,000. Group registration can streamline compliance but increases risk sharing. Timely registration and deregistration decisions reduce the risk of penalties and improve financial planning.
Section C: VAT Rates and Categories
UK VAT applies at different rates depending on the liability of the goods or services supplied. Getting the rate right protects margin and avoids assessments and penalties. Headline rates are 20% (standard), 5% (reduced), 0% (zero rate), with some supplies exempt from VAT. Zero-rated items are taxable at 0% (input VAT normally recoverable); exempt items are outside the scope of recovery unless within partial exemption rules.
1. Standard rate (20%)
The standard rate is 20% and applies by default unless a reduced, zero-rate or exemption specifically applies. Typical examples include most consumer goods, professional services, catering and hospitality, electronics, furniture, and most retail items.
2. Reduced rate (5%)
The reduced rate of 5% applies to specific categories set out in legislation and HMRC notices. Common examples include domestic fuel and power and children’s car seats. Always verify eligibility criteria (e.g., qualifying domestic use tests for fuel and power; product specifications for car seats).
3. Zero rate (0%)
Zero-rated supplies are taxable, but VAT is charged at 0% so related input VAT is generally recoverable. Common examples include most food and drink for home consumption (with notable exceptions such as catering and some confectionery), children’s clothing and footwear, books, newspapers and qualifying electronic publications, many domestic passenger transport services, and exports of goods. Installations of energy-saving materials in residential accommodation in Great Britain are currently zero-rated under time-limited relief (with Northern Ireland alignment via the Windsor Framework rules).
4. Exempt supplies
Exempt supplies attract no VAT and normally restrict input VAT recovery directly related to making those supplies (subject to partial exemption). Common exemptions include financial services and insurance, certain health and welfare services, postal services by the universal service provider, betting, gaming and lotteries, and rentals and licences of land (subject to options to tax and specific exceptions).
5. Choosing the correct rate (triage)
- Classify the supply first: Identify whether your supply is goods, services, or a mixed/composite package. Determine the principal element and whether ancillary elements follow the principal (single supply) or require apportionment (multiple supplies).
- Check schedule/notice mapping: Verify if the item appears in zero-rate schedules (e.g., food, children’s clothes), reduced-rate provisions (e.g., domestic fuel and power), or exemption categories (e.g., finance, health, land).
- Evidence and records: Retain product specs, usage declarations (e.g., qualifying domestic use for fuel/power), and export/transport evidence to support the rate applied.
- Review edge cases: Catering vs cold takeaway food, printed books vs stationery, adult vs children’s clothing, bundled supplies (e.g., training + printed materials), and digital content vs e-publications.
Section summary: Apply 20% unless a specific relief or exemption applies. Zero-rated items remain taxable with input recovery; exempt items typically restrict recovery and may require partial exemption treatment. Maintain written evidence for every reduced/zero-rate decision, especially for exports, domestic fuel and power, and e-publications.
Section D: VAT Compliance and Filing
Once registered, a business must comply with VAT filing, payment and record-keeping obligations. Compliance failures expose businesses to penalties under the post-January 2023 regime, where late submission points and late payment charges apply. Good process management ensures accurate returns and protects cash flow.
1. Filing VAT returns
Most businesses file quarterly VAT returns. Each covers three months, with the return and any payment due one month and seven days after the period end. Some businesses may apply for monthly returns (often repayment traders) or annual accounting (turnover ≤ £1.35m) where one return per year is filed with instalment payments on account.
Deadlines matter: Missing filing or payment deadlines triggers late submission points or late payment penalties. Businesses should diarise due dates and align VAT processes with management reporting cycles.
2. Making Tax Digital (MTD)
All VAT-registered businesses must comply with MTD for VAT. This requires:
- Digital records of sales, purchases and VAT transactions
- MTD-compatible software to file returns directly to HMRC
- Digital links between systems (no manual cut-and-paste), although bridging software is permitted
MTD increases audit visibility. Finance teams should ensure all digital records and calculations are complete and that bridging arrangements meet HMRC’s digital links standard.
3. Penalties and interest (post-Jan 2023 regime)
The Default Surcharge no longer applies. Instead, HMRC operates a points-based late submission regime and a separate late payment penalty and interest regime:
- Late submission points: A point is charged for each late VAT return. Quarterly filers receive a £200 penalty once they hit 4 points in a rolling period. Points expire after a period of compliance (usually 12 months).
- Late payment penalties: 2% of VAT due if payment is 16–30 days late, 4% if over 30 days late. Additional daily penalties accrue on unpaid amounts after 31 days.
- Interest: HMRC charges interest on late VAT at the Bank of England base rate plus 2.5%.
Businesses should have clear processes for monitoring due dates and cash flow to avoid penalties. Where payment difficulties arise, contact HMRC to agree a Time to Pay arrangement, which can mitigate charges.
4. Common compliance errors
- Charging the wrong VAT rate (e.g., misclassifying zero vs exempt)
- Failing to apply the correct tax point for deposits and continuous supplies
- Incorrectly reclaiming VAT on blocked items (e.g., client entertainment)
- Omitting reverse charge adjustments for international or domestic supplies
- Late error correction rather than using VAT652 where thresholds are exceeded
Finance leaders should maintain an internal VAT checklist, update tax points regularly, and review VAT returns against management accounts before submission.
Section summary: VAT compliance requires accurate records, timely submissions, and awareness of the new penalty regime. MTD obligations mean digital systems and links are mandatory. Businesses that align VAT controls with finance routines and maintain audit-ready files reduce the risk of HMRC scrutiny and penalty exposure.
Section E: Reclaiming VAT
One of the main advantages of VAT registration is the ability to reclaim input VAT on purchases and expenses related to taxable business activities. This reduces the net liability payable to HMRC. However, claims must be supported by proper documentation and comply with HMRC restrictions.
1. What VAT can be reclaimed
Input VAT can be reclaimed where:
- The business is VAT-registered
- The goods or services are used for making taxable supplies (standard, reduced, or zero rate)
- A valid VAT invoice or receipt is held
VAT cannot usually be reclaimed on business entertainment costs, personal expenses, or certain motor expenses (e.g., purchase of most cars available for private use). Businesses making exempt supplies must apply partial exemption rules.
2. Documentation and evidence
HMRC requires specific documentation to support VAT reclaims:
- Valid VAT invoices: must show supplier name, address, VAT number, invoice date, description of goods or services, net amount, VAT rate and VAT amount
- Simplified VAT invoices: permitted for sales ≤ £250, must show VAT-inclusive total and VAT rate
- Digital records: under MTD rules, invoices and VAT data must be stored in digital format with digital links
Without a valid VAT invoice, HMRC can disallow the input VAT claim.
3. Partial exemption
If a business makes both taxable and exempt supplies, it is partially exempt. Input VAT directly related to taxable supplies is reclaimable; input VAT directly related to exempt supplies is not. Overheads are apportioned using a standard or special method. Businesses must apply the de minimis test (recoverable if exempt input VAT ≤ £625 per month and ≤ 50% of total input VAT). An annual adjustment is required after the end of each VAT year.
4. Capital goods scheme (CGS)
Large capital purchases such as land, buildings and expensive equipment are subject to CGS adjustments. Input VAT recovery is reviewed over several years (10 years for land/buildings; 5 years for other assets costing £50,000+). If the business’s taxable/exempt use changes, VAT recovered is adjusted accordingly.
5. Bad debt relief
Where a customer debt remains unpaid for 6 months after the due date and has been written off in the accounts, VAT previously accounted for can be reclaimed via bad debt relief. The claim must be supported by evidence of write-off and pursued through the VAT return.
6. Overseas and reverse charge transactions
For imported goods, VAT is declared and reclaimed through Postponed VAT Accounting (PVA). For cross-border services, the reverse charge applies: the UK business accounts for both output and input VAT on the same transaction. This is neutral in most cases but ensures the transaction is reported. UK businesses incurring VAT overseas (e.g., EU travel expenses) may be able to claim refunds under the 13th Directive refund scheme (subject to conditions).
Section summary: Reclaiming VAT offsets costs and ensures neutrality in the system. To secure recovery, maintain valid invoices, apply partial exemption and CGS rules correctly, and monitor for bad debt relief opportunities. Businesses trading internationally must apply reverse charge and refund mechanisms correctly to avoid disallowances.
Section F: VAT for International Businesses
Cross-border transactions attract special VAT rules. Since Brexit, trade with the EU is treated the same way as with non-EU countries, requiring careful attention to import VAT, export zero-rating, and the place of supply rules for services. Businesses operating internationally must manage compliance both in the UK and in overseas jurisdictions.
1. VAT on imports
Goods imported into the UK are subject to import VAT at the rate applicable to equivalent domestic supplies. The taxable value includes the cost of the goods, shipping, insurance and any import duties. VAT-registered businesses can use Postponed VAT Accounting (PVA) to declare and reclaim import VAT on the same VAT return, improving cash flow by avoiding upfront border payments.
2. VAT on exports
Exports of goods from the UK to any overseas destination (including the EU) are generally zero-rated. Businesses must retain evidence of export (such as bills of lading, airway bills, or official export declarations) to support zero-rating. Without evidence, HMRC may assess VAT at the standard rate.
For services, the place of supply rules determine whether UK VAT applies. In general:
- B2B services: place of supply is where the customer belongs; no UK VAT if the customer is outside the UK.
- B2C services: place of supply is where the supplier belongs, unless specific exceptions apply (e.g., digital services, land-related services, passenger transport).
3. Reverse charge mechanism
When a UK business buys services from an overseas supplier, the reverse charge normally applies. The UK business accounts for output VAT as if it had supplied the service and claims input VAT subject to normal rules. The net effect is neutral where the business has full input recovery, but partial exemption or blocked input VAT may create a cost. The domestic reverse charge also applies in certain UK sectors such as construction (CIS-aligned) and telecommunications.
4. EU VAT obligations post-Brexit
UK businesses selling goods B2C to EU consumers may need to register for VAT in the EU. Options include:
- Import One Stop Shop (IOSS): for low-value consignments imported into the EU (≤ €150).
- Non-Union One Stop Shop (OSS): allows UK businesses to account for EU VAT on B2C services and intra-EU distance sales of goods via one EU registration.
Businesses should factor in customs duties, import VAT in the EU, and local registration obligations when exporting. Overseas VAT incurred (e.g., at EU trade shows) may be refundable under the 13th Directive scheme, but claims are time-limited and require full documentation.
5. Non-EU country considerations
Each non-EU country operates its own VAT or sales tax system. Some require local VAT registration where services are supplied or goods imported. Rules vary widely. Businesses expanding globally should review indirect tax obligations country by country and seek local advice where necessary.
Section summary: International VAT compliance requires managing import VAT (using PVA), securing evidence for zero-rated exports, applying the correct place of supply rules, and handling reverse charge adjustments. UK businesses trading with the EU must consider OSS/IOSS registration, while non-EU markets require country-specific VAT compliance. Advance planning reduces costs and avoids disruption.
Section G: VAT Penalties and Appeals
HMRC can impose penalties and interest where businesses fail to comply with VAT obligations. Since January 2023, the old Default Surcharge regime has been replaced with a points-based system for late submissions and a separate structure for late payments. Understanding the rules helps finance leaders manage risk and avoid unnecessary costs.
1. Common reasons for penalties
- Failing to register on time when exceeding the £90,000 threshold
- Late submission of VAT returns
- Late payment of VAT liabilities
- Submitting incorrect VAT returns (errors, omissions, or misclassifications)
- Deliberately underreporting or concealing VAT due
2. Late submission penalties
Each late VAT return incurs a point. Quarterly filers receive a penalty of £200 once they reach four points. Points expire after a period of compliance (normally 12 months for quarterly filers). The system is intended to be proportionate but can escalate quickly for repeated failures.
3. Late payment penalties and interest
Penalties apply in stages:
- No penalty if VAT is paid or a Time to Pay arrangement is agreed within 15 days of the due date
- 2% penalty if VAT remains unpaid at day 16–30
- 4% penalty if VAT remains unpaid at day 31
- Additional daily penalties of 4% per annum apply after day 31 until payment is made
HMRC also charges late payment interest from the due date until payment, at the Bank of England base rate plus 2.5%.
4. Errors in VAT returns
HMRC distinguishes between careless errors, deliberate errors, and deliberate and concealed errors:
- Careless errors: penalty range 0–30% of underpaid VAT, depending on disclosure
- Deliberate errors: penalty range 20–70%
- Deliberate and concealed errors: penalty range 30–100%
Unprompted disclosure reduces penalties significantly. Prompted disclosure (after HMRC opens an enquiry) leads to higher penalties.
5. Appeals and reasonable excuse
Businesses can appeal penalties if they believe they were issued incorrectly or if there is a reasonable excuse for non-compliance. Common reasonable excuses include serious illness, IT failures, or HMRC service issues. Appeals can be made directly to HMRC, or escalated to the First-tier Tribunal (Tax) within 30 days of the penalty notice.
6. Preventing penalties
- Maintain accurate VAT records and reconciliation processes
- File and pay on time, with reminders and software alerts in place
- Disclose errors voluntarily via VAT652 or adjustments in the next return
- Ensure staff handling VAT are trained and up to date with HMRC notices
- Seek advice promptly if complex transactions are involved
Section summary: VAT penalties can escalate quickly under HMRC’s new system. Businesses should prioritise timely submissions and payments, error prevention through good processes, and voluntary disclosure where mistakes occur. Appeals are available, but proactive compliance is the most effective defence.
Section H: VAT Planning and Strategies
VAT planning is about more than compliance. By using the right schemes, reliefs and timing strategies, businesses can improve cash flow, reduce administrative burdens, and manage long-term VAT exposure. Finance leaders should review VAT arrangements regularly to ensure they remain optimal as the business grows or changes direction.
1. Process planning and controls
Strong VAT processes reduce errors and improve efficiency. Key measures include:
- Using MTD-compatible software with digital links for all VAT records
- Setting internal deadlines well before HMRC filing dates
- Conducting quarterly VAT reconciliations against management accounts
- Carrying out internal VAT audits to catch misclassifications early
Embedding these controls ensures audit-readiness and minimises the risk of HMRC challenge.
2. Cash flow strategies
VAT can affect liquidity, especially where customers pay late. Options to improve cash flow include:
- Cash Accounting Scheme: VAT is only payable once cash is received, available if turnover ≤ £1.35m
- Postponed VAT Accounting (PVA): allows import VAT to be declared and reclaimed on the same return
- Carefully timing large purchases before quarter-end to accelerate VAT recovery
Finance teams should model VAT cash flow to align with working capital needs.
3. Planning for small businesses and startups
Small businesses should weigh up the benefits and costs of voluntary VAT registration below the £90,000 threshold. Early registration allows input VAT recovery, especially on startup costs, but also introduces administrative obligations. Other considerations include:
- Flat Rate Scheme: simplifies VAT by paying a fixed percentage of gross turnover if taxable turnover ≤ £150,000 (exit threshold £230,000). The scheme reduces admin but may cost more where input VAT is significant.
- Choosing the right accounting scheme to match cash flow patterns
- Monitoring turnover monthly to anticipate registration or deregistration
4. Business expansion
As businesses grow, VAT complexity increases. Expansion strategies should account for:
- Group VAT registration: simplifies compliance but creates joint and several liability
- Capital Goods Scheme: reviewing recovery of input VAT on high-value assets over time
- Overseas VAT: considering OSS/IOSS for EU sales and local registration in non-EU jurisdictions
VAT planning at the expansion stage prevents unexpected costs and ensures global compliance.
5. Preparing for a VAT audit
HMRC audits often focus on recurring errors such as misclassified supplies, insufficient export evidence, or incorrect application of partial exemption. Preparation steps include:
- Maintaining clear evidence files (export documentation, tax point schedules, partial exemption calculations)
- Ensuring all VAT invoices and credit notes are valid and stored digitally
- Carrying out dry-run audits internally to identify weaknesses
Professional representation may be advisable for complex businesses or where disputes are anticipated.
Section summary: VAT planning supports both compliance and financial health. Businesses should review scheme eligibility, optimise timing of transactions, and prepare proactively for audits. Startups benefit from early consideration of voluntary registration, while expanding businesses must address group VAT, capital goods adjustments, and international compliance.
Section I: Debunking VAT Myths
VAT is often misunderstood, leading to costly mistakes and missed opportunities. Addressing common myths helps finance leaders and business owners separate fact from fiction and manage VAT effectively.
1. Myth: Only large businesses need to worry about VAT
Reality: VAT applies to all businesses once they exceed the £90,000 threshold, and even smaller businesses may benefit from voluntary registration. Compliance obligations are the same regardless of size once registered.
2. Myth: Once registered, you can reclaim VAT on everything
Reality: Input VAT can only be reclaimed on costs directly related to taxable business activities. VAT on personal expenses, business entertainment, and some motor costs is blocked. Incorrect claims risk penalties.
3. Myth: If turnover is below the threshold, VAT is irrelevant
Reality: Even below the threshold, businesses should monitor turnover monthly, as exceeding the limit requires prompt registration. Voluntary registration may also be beneficial for reclaiming startup VAT or trading with VAT-registered customers.
4. Myth: VAT is always passed on to the customer
Reality: While VAT is charged to customers, it still impacts your business. Pricing strategies, competitiveness, and cash flow are all affected by how VAT is accounted for and recovered.
5. Myth: Zero-rated and exempt supplies are the same
Reality: Zero-rated supplies are taxable at 0%, allowing input VAT recovery. Exempt supplies are outside the scope of recovery unless partial exemption rules allow some input VAT to be reclaimed. Mixing them up can distort VAT recovery calculations.
6. Myth: Submitted VAT returns cannot be corrected
Reality: Errors can usually be corrected by adjusting the next return (subject to thresholds). Larger errors must be disclosed to HMRC on form VAT652. Prompt correction limits penalties and interest.
7. Myth: VAT is too complex to manage, so it’s best ignored
Reality: Ignoring VAT obligations leads to severe penalties and interest. With proper systems, software, and professional advice, VAT can be managed efficiently and with minimal risk.
Section summary: VAT applies to all registered businesses, large or small. Misunderstandings around reclaim rules, thresholds, and supply categories can be costly. Clear processes and regular reviews prevent errors and ensure VAT is managed as part of normal financial control.
Section J: Summary
VAT is central to the UK tax system and directly affects business pricing, profitability, and compliance obligations. The registration threshold of £90,000 requires close monitoring, with voluntary registration often beneficial below this level. Different VAT rates apply to goods and services, and correct classification is essential to avoid penalties.
Compliance has been tightened under Making Tax Digital and the post-2023 penalty regime. Late submission points, staged late payment penalties, and interest charges mean businesses must keep accurate digital records, file returns on time, and maintain cash flow discipline.
Reclaiming VAT is a valuable relief, but only where supported by valid documentation and within the rules on blocked input tax, partial exemption, and capital goods adjustments. International transactions require careful application of import VAT, zero-rating for exports, reverse charges, and potential EU or overseas registrations.
Effective VAT planning enhances cash flow, supports competitiveness, and prepares the business for HMRC scrutiny. Proactive strategies—such as selecting the right accounting scheme, maintaining strong controls, and preparing for audits—reduce both cost and risk.
Overall, VAT is both a compliance obligation and a strategic consideration for UK businesses. Finance leaders and owners who integrate VAT into financial planning will be better placed to minimise risk, optimise recovery, and maintain profitability.
Section K: FAQs
1. Who needs to register for VAT?
Any business with taxable turnover above £90,000 in a rolling 12-month period must register. You must also register if you expect to exceed £90,000 in the next 30 days. Voluntary registration is allowed below the threshold.
2. What happens if I miss the VAT return deadline?
Late filing attracts submission points. Quarterly filers get a £200 penalty once four points are reached. Late payment penalties start at 2% after 15 days and rise if unpaid after 30 days, plus interest.
3. Can VAT be reclaimed on all business expenses?
No. Input VAT is blocked on business entertainment, certain motor expenses, and personal costs. Recovery is restricted if you make exempt supplies. Valid VAT invoices are always required.
4. What is Making Tax Digital (MTD)?
MTD requires all VAT-registered businesses to keep digital VAT records and file using MTD-compatible software with digital links. Manual re-keying is not allowed.
5. Are there different VAT rates?
Yes. Standard rate is 20%, reduced rate is 5%, zero rate is 0%. Some supplies are exempt. Always check HMRC guidance for the correct rate and keep evidence.
6. How do I correct an error in a VAT return?
Small errors can be adjusted in the next VAT return. Larger errors (over £10,000 or above set thresholds) must be disclosed using form VAT652. Prompt disclosure reduces penalties.
7. Is VAT charged on exports?
Exports of goods are usually zero-rated, but evidence of export must be retained. Services follow place of supply rules, which differ for B2B and B2C transactions.
8. What is the reverse charge mechanism?
The reverse charge shifts the responsibility for accounting for VAT from the supplier to the customer. It applies to cross-border services and certain UK sectors such as construction.
9. How can I avoid VAT penalties?
Maintain accurate records, file and pay on time, and disclose errors voluntarily. Use MTD-compatible software and consider professional advice for complex areas such as partial exemption or international trade.
Section summary: VAT FAQs highlight common compliance issues faced by businesses. Monitoring thresholds, filing on time, reclaiming only eligible VAT, and following HMRC rules on exports and reverse charges are key to managing risk.
Section L: Glossary
| VAT (Value Added Tax) | A UK consumption tax on goods and services, collected by businesses and ultimately borne by consumers. |
| Input VAT | VAT incurred on purchases and expenses, reclaimable if related to taxable supplies. |
| Output VAT | VAT charged on sales of goods and services to customers. |
| VAT threshold | The taxable turnover level (£90,000 from April 2024) requiring VAT registration. Deregistration threshold is £88,000. |
| Standard rate | The default VAT rate of 20% applied to most goods and services. |
| Reduced rate | A 5% VAT rate applied to specific goods and services such as domestic fuel and children’s car seats. |
| Zero rate | VAT charged at 0%, allowing input VAT recovery (e.g., food, children’s clothing, books, exports). |
| Exempt supplies | Supplies not subject to VAT where input VAT is usually irrecoverable (e.g., financial services, healthcare, property rentals). |
| Partial exemption | A method to apportion input VAT where a business makes both taxable and exempt supplies. |
| Capital Goods Scheme (CGS) | A mechanism adjusting input VAT recovery over time for high-value assets like land, buildings, and equipment. |
| Bad debt relief | A relief allowing recovery of VAT on unpaid debts written off at least 6 months after the due date. |
| Making Tax Digital (MTD) | A requirement for VAT-registered businesses to keep digital records and file returns through compatible software. |
| Reverse charge | A VAT accounting method where the customer accounts for both output and input VAT, commonly used in cross-border services and specific UK sectors. |
| Postponed VAT Accounting (PVA) | Allows import VAT to be declared and reclaimed on the same VAT return instead of paying at the border. |
| Group VAT registration | Two or more companies under common control register as one VAT group, simplifying compliance but creating joint liability. |
| Late submission points regime | The penalty system introduced in 2023 where points accrue for late returns; a £200 penalty applies once the points threshold is reached. |
| Late payment penalties | Staged penalties (2% after 15 days, 4% after 30 days) plus daily interest for overdue VAT. |
Section M: Useful Links
| HMRC VAT Guidance | Official HMRC overview of VAT rules, rates, registration and compliance. |
| VAT Registration | Step-by-step guide on registering for VAT, including thresholds and process. |
| Making Tax Digital for VAT | Details of MTD requirements for record-keeping and filing VAT returns digitally. |
| VAT Rates on Goods and Services | Comprehensive HMRC guide to which VAT rates apply to different supplies. |
| Reclaiming VAT | HMRC guidance on how to reclaim VAT on eligible business expenses. |
| VAT on Imports and Exports | Rules on import VAT, export zero-rating, and international VAT compliance. |
| VAT Penalties and Interest | HMRC explanation of penalties for late filing, late payment and errors. |
| VAT Schemes | Overview of available VAT accounting schemes, including Flat Rate and Cash Accounting. |
| Find a Chartered Accountant | ICAEW directory to locate qualified accountants for VAT and tax advice. |
| HMRC VAT Helpline | Direct contact point for VAT queries with HMRC. |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
