Limited Company: Understanding VAT

VAT Making Tax Digital

VAT can be a confusing subject.  However, having an understanding of it is important for any business, whether a limited company or self-employed.

This article will give you an overview of the key points relating to VAT rates, registration and record keeping.  The HMRC website also provides a detailed overview of VAT if you need further information. 

What is VAT?

VAT stands for Value Added Tax and is charged on most goods and services that UK business sell in the UK (and EU until 31st December 2020).

Current VAT rates are:

Standard Rate (20%),

Reduced Rate (5%)

Zero Rate (0%)

Some items are exempt of VAT and not included in your VAT taxable turnover. 

Zero rated goods are VAT taxable and included in your VAT accounts.  They also count towards your taxable sales for VAT in terms of the VAT threshold.

You can find out more about VAT rates on the HMRC website.

Who can register for VAT?

Both Limited companies and sole readers can register for VAT.  You can voluntarily register at any time but you are legally required to register for VAT when:

  • Your VAT taxable turnover exceeds the current threshold of £85,000 within a 12-month period.
  • You must also register if you expect your turnover to exceed the threshold in a single 30 day period.
  • Business that only sell VAT-exempt goods and services are not allowed to register for VAT.

You need to register for VAT within 30 days of meeting the above criteria.   You may be fined if you don’t register (check out the penalties here).

When should I start charging VAT?

When your turnover reaches the VAT threshold in a rolling 12 month period, you must start charging VAT at the start of the month following the month in which you exceed the threshold.  For example if your sales for the 12 months to September 2020 exceed £85,000, your registration date will be 1 November 2020.

You must start charging VAT straight away if you expect to exceed the threshold in a single 30-day period. 

How do I register for VAT

It’s easy to register for VAT on your own and it costs nothing. Your best bet is to do it online through the HMRC website.

When registering, you need to decide whether to register for Standard Rate VAT or Flat Rate VAT, where you simply pay a percentage of your turnover.  There’s more information about flat rate VAT on the HMRC website.

Once you’re registered for VAT

Once registered for VAT you need to:

  • add VAT to your prices
  • issue VAT invoices to your customers
  • file VAT returns and pay any VAT due to HMRC
  • keep digital VAT records and a VAT account

How often do I need to file a VAT return?

VAT returns are usually filed quarterly.  

Businesses above the VAT threshold must submit VAT using Making Tax Digital-compliant software.  If you have registered voluntarily, you can submit your VAT return through your VAT online account.

Either way, you can choose to use Cloud Accounting software such as Xero to prepare and file your VAT returns.  This also makes you compliant with the government’s Making Tax Digital plans, which requires businesses with turnover over £85,000 to now use digital methods to store and submit their VAT information to HMRC.  

What VAT do I need to Pay

Unless you’re in a flat rate scheme, you’ll work out VAT by comparing the amount you paid on purchases to the amount you collected on sales.

If you get a positive number, you need to pay that amount to HMRC. If it’s a negative number, you’ll get refunded that amount.

Automate your VAT calculations

If you stay on top of your bookkeeping, for example using Xero, the software will automatically collect sales and purchase information and work it out for you.  Equally, if you are up to date with your accounts, you'll have a running count of your VAT situation so you always know where you stand. and what you owe or are owed.  When the VAT period is over, you just connect to HMRC and submit your return online.  All the information is ready to go.

What next?

If you are close to the VAT threshold or need further support on VAT registration, record keeping or rates, please get in touch