VAT: Registration, Reporting, and What Rate of VAT Applies

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VAT is a familiar friend. But that’s where it stops – with familiarity. Few people – business owners and contractors alike – have a good grasp of the concept of VAT.

The simplest way to understanding VAT better is getting to know HMRC’s rules on VAT.

What is VAT?

Simply put, VAT or Value Added Tax, is the amount of tax that is charged on top of goods and services in the UK and the EU. VAT is added to the amount paid when buying a certain product.

When buying goods and services, there are three types or rates of VAT: Standard Rate, which is equal to 20%, Reduced Rate, equal to 5%, and Zero Rate. However, not all items are subject to VAT. There are some that may be VAT exempt or are outside the scope of VAT.

VAT exempt is different from Zero Rated VAT because goods or services that are VAT exempt are non-taxable. This means that these goods and services are not recorded in the VAT return when they are sold. On the contrary, Zero Rated VAT items are goods and services that are taxable by VAT, but no VAT is added to a customer’s bill. This means that these items are considered “taxable sales” and are still included in the taxable turnover or your VAT accounts, which allows you to reclaim VAT on expenses. To make it simple, zero-rated goods are VAT taxable, only at 0%, while VAT exempt goods are non-taxable. So, with these two types of goods, customers are not charged any VAT on top of the selling price.

Examples of VAT Rates on Goods and Services

The information below illustrates examples of the applied VAT rates on certain goods and services:

Standard Rate (20%)

Examples of goods and services that have a 20% VAT on top their selling price include:

  • Web Design services
  • Electronics
  • Consultancy
  • Photography services
  • Software or software licenses
  • Other goods and services

Reduced Rate (5%)

The following are some goods and services with a 5% reduced VAT:

  • Energy efficiency materials (e.g., insulation)
  • Domestic utilities (e.g., gas)
  • Nicotine patches
  • Alterations and renovations on property
  • Sanitary products
  • Children’s car seats

Zero Rate (0%)

Below are examples of products and services that are zero-rated:

  • Books*
  • Newspapers*
  • Protective clothing
  • Printing of brochures
  • Buying a helicopter
  • Construction activities (most)

*For e-books and online newspapers, magazines, and journals, no VAT will be applied beginning 1st December 2020.

VAT-Exempt

These are examples of goods and services that are exempt from VAT:

  • Financial services (most)
  • Insurance
  • Lottery tickets
  • Funeral costs
  • Houseboat moorings
  • Postage stamps

Who can register for VAT?

VAT registration is voluntary for most business owners. However, there are certain conditions that may require, by law, owners of limited companies, as well as sole traders to register for VAT.

When must I register for VAT?

You are obligated to register for VAT within 30 days when you meet any of the following criteria:

  • when our VAT-taxable turnover exceeds the threshold, which is currently set at £85,000 within a rolling period of 12 months. Vat-taxable turnover refers to the total amount of sales that are not exempt from VAT
  • when your VAT-taxable turnover is expected to exceed the threshold in a single 30-day period
  • when you only sell goods or services that are exempt from VAT, but when the amount of goods and services that you purchase from VAT-registered suppliers in the EU go beyond the threshold

Be sure to monitor your turnover and give yourself ample time to complete your registration if you realise that you will be reaching the threshold. Penalties are in place if you do not notify HMRC in time.

When should I start charging VAT?

Ideally, you can start charging VAT on the first day of the second month after your VAT turnover reaches the threshold in a 12-month rolling period.

For instance, your sales for the past 12 months prior to 30th June 2020 are £85,000, then you should register for VAT by 1 August 2020.

If you go beyond the threshold within 30 days, then you must start charging VAT on your goods and services.

Why is VAT charged on top of recharged expenses?

When your business incurs costs in the process of supplying goods and services to your customers, these costs are referred to as recharges. Once you have completed your VAT registration, then you can start charging VAT on the amount recharged to the client. You must start charging VAT although your business expenses originally were not charged any VAT.

To illustrate this better, think of a train ticket. When you purchase a £100 train ticket, you are not charged any VAT, but this expense is recorded in your company accounts. The instance you sell the ticket to another customer, VAT must be charged and included on your invoice. The VAT added to the ticket depends on how much you sell it for. So, for instance, you resell the ticket for £150, then, the VAT charged will be based on that price.

What happens if I don’t register for VAT when I should?

Registration for VAT is retrospective. So, apart from charging you penalty for late registration, HMRC will also add VAT to the sales that you made during the retrospective date, whether or not you were able to add VAT to your goods and services. This could lead to terrible amount of losses, so you want to make sure you register for VAT on time.

Keep an eye on your VAT turnover and if you expect it to go beyond the threshold, then prepare to process your VAT registration. If you could voluntarily register even if you have not met any of the criteria mentioned in this article, you may be allowed to and it may even prove to be an advantage for your business.

Why would I consider voluntary VAT registration?

There are several reasons why you would want to register for VAT voluntarily.

  • First, with voluntary registration, VAT added on your businesses expenses can be reclaimed, provided these apply the 20% standard rate.
  • Voluntary registration also allows you to save on administrative tasks when you prepare your quarterly VAT return as you can register for a reduced Flat Rate of VAT. This is only applicable to those that use the flat rate.
  • Another reason is, if you have big clients that are also VAT registered, they are already familiar with VAT rates applied. They understand the VAT added to certain goods and they also have the option to reclaim the VAT on the items that they purchase.
  • Lastly, registering for VAT adds credibility to your business. Credibility attracts more clients and earns their trust. This also makes your limited company look less of a struggling startup, and instead, more professional.

Why might I not want to register voluntarily?

  • Some clients, especially small companies that are not VAT registered, may not be used to seeing VAT added to the price of goods and services. With the VAT applied on your own products, they might think that what you are selling are more expensive. Also, clients that are not VAT registered are not able to reclaim the 20% VAT that you add.
  • Registering for VAT will mean added tasks for you. One of your obligations will be submitting a VAT return every three months and failure to submit one on time leads to HMRC charging you a corresponding late penalty.
  • Another requirement you must comply with is having digital copies of your records. This is according to the Making Tax Digital for Business policy, put into effect on 1st April 2019, that requires business owners to keep electronic copies of their records. When you submit your records, you must do so using a registered software.
  • With your VAT registration, monitoring your cash flow and profit may prove to be more difficult. You will need an extra hand to make sure all your records are updated.

How do I register for VAT?

It is now easier to complete VAT registrations because these can now be done online. All you need to do is logon to Gov.uk for a guide on how to register for VAT. You also have the option to use registered accounting software that will help you with your calculations and filing online. You only need to choose the VAT rate you would want to register for – Standard Rate or Flat Rate.

Standard Rate VAT vs Flat Rate VAT Schemes

There are two schemes to choose from when registering for VAT. These are Standard Rate VAT and Flat Rate VAT.

Standard Rate VAT allows business owners to reclaim VAT on all items that are bought or sold. On the other hand, Flat Rate VAT is a simplified system and is usually recommended for smaller businesses, freelancers, and contractors. Businesses that have a turnover forecast of no more than £150,000 in the next 12 months are suggested to register under this rate.

Under the Flat Rate VAT scheme, you will be required to pay HMRC a predetermined VAT rate according to the type of industry your business is listed under. This is calculated by adding the Standard VAT rate of 20% from the sales invoice and collecting the full amount from the client. Once you have the gross amount, you must apply the sector percentage. The amount obtained is the amount that you owe HMRC. This is paid through your VAT return. The difference between the standard rate and the rate paid to HMRC becomes your company’s income.

The VAT rate applied is different for every industry. Refer to the table below to check what rate is used for your business type. First time registrants for the Flat Rate scheme are given a 1% discount for the first year.

Flat Rate % for 2020/21 & 2019/20 TYPE OF BUSINESS
4
  • Retailing food, confectionery, tobacco, newspapers, or children’s clothing
5
  • Post offices
6.5
  • Farming or agriculture
  • Fuel or Retailing vehicles
  • Pubs
7.5
  • Retailing not listed elsewhere
  • Wholesaling food
8
  • Membership organisation
  • Retailing pharmaceuticals, medical goods, cosmetics, or toiletries
  • Wholesaling agricultural products
8.5
  • Printing
  • Repairing vehicles
  • Sport or recreation
  • Wholesaling not listed elsewhere
9
  • Manufacturing food
  • Manufacturing yarn, textiles, or clothing
  • Packaging
9.5
  • General building or construction services *
  • Hiring or renting goods
  • Manufacturing not listed elsewhere
10
  • Mining or quarrying
  • Transport or storage, including couriers, freight, removals, and taxis
10.5
  • Computer repair services
  • Forestry or fishing
  • Hotel accommodation
  • Manufacturing fabricated metal products
  • Travel agency
  • Waste or scrap dealing
11
  • Advertising
  • Agricultural services
  • Photography
  • Publishing
  • Social work
  • Veterinary medicine
12
  • Boarding or care of animals
  • Business services not listen elsewhere
  • Estate agency or property management services
  • Investigation or security
  • Laundry or dry-cleaning services
  • Other activities not listed elsewhere
12.5
  • Catering services including restaurants and takeaways
  • Entertainment or journalism
13
  • Film, radio, television, or video production
  • Hairdressing or other beauty treatment services
  • Secretarial services
13.5
  • Financial services
14
  • Management consultancy
  • Real estate activity not listen elsewhere

14.5

  • Accountancy or bookkeeping
  • Architect, civil, and structural engineer or surveyor
  • Computer and IT consultancy or data processing
  • Labour-only building or construction services *
  • Lawyers or legal services
16.5
  • Limited cost trader

 

*”Labour-only building or construction services” refers to building services with supplied materials that cost less than 10% of the turnover. If the value of the materials exceeds this amount, then the business service will be listed under “General building or construction services”.

How do I know which VAT scheme is best for me?

Before choosing a VAT scheme and registering for VAT, it is important to consider the following factors:

  • Your turnover
  • Your clients
  • Expenses that you can reclaim VAT on

You may check our simplified guide on choosing the right scheme. However, we would still recommend speaking to an accountant before making a decision to make sure you choose the best option for the type of business that you have.

 

Turnover VAT- taxable expenses Client type Suggested VAT option
Less than £85,000 Less than 1.5% of turnover Mostly non-VAT registered customers Don’t register for VAT
Any More than 1.5% of turnover Mostly VAT registered customers Register for standard rate VAT
More than £85,000 Less than 1.5% of turnover Any Register for Flat Rate VAT

 

How to Use the 14.5% Flat Rate

Let’s say you have a business that offers services for £1,000. Applying the 20% Standard Rate VAT, your clients should pay £1,200 (£1,000 for the services + £200 VAT). Getting the 14.5% Flat Rate, you are required to pay HMRC £174. The difference between £200 and £174, which is equal to £26, is recorded as your business’ income.

If you register for the Flat Rate scheme, you will not be able to reclaim the VAT on purchases you make, only on capital assets that cost £2,000.

If it is your first time to register under the Flat Rate scheme, you may apply a 1% discount during the first year.

How often do I need to file a VAT return?

You are required to complete a VAT return every three months. VAT returns that are filed late are subject to penalty from HMRC.

Again, you are allowed to use licensed online accounting software in order to calculate your VAT return automatically. Online accounting services may also help you file your VAT return.

How do I report VAT?

VAT is reported through the VAT return submitted to HMRC either online or through a registered online accounting software. This is done by registered businesses on a quarterly basis. The VAT return contains information on how much Value Added Tax a business has paid and received. There are instances when, after filing your VAT return, you owe HMRC a payment or, the other way around where HMRC may need to give you a refund. This depends on the income and expenses declared in your VAT return.

The new program, Making Tax Digital which was effected on 1st April 2019, requires businesses that are registered for VAT to have electronic copies of their VAT returns and submit them to a digital platform.

What is VAT MOSS?

VAT MOSS stands for Value Added Tax: Mini One Stop Shop. It offers a way to pay VAT for businesses that supply digital services to other EU countries. In order to avoid the complicated process of having a UK businesses register for VAT in all the EU countries they do business in, VAT MOSS allows these businesses to pay for VAT in HMRC. However, instead of following the UK VAT rate, businesses have to pay VAT according to the rate used in the country where the product was originally bought. The quarterly payments for VAT MOSS are scheduled every 20th April, 20th July, 20th October, and 20th January.

What should I do next?

Businesses that have profits that are expected to exceed the VAT threshold are normally advised to register for VAT based on the rate scheme they choose. However, we always believe that accountants make the best advisers when it comes to decisions on VAT registration. More Than Accountants has a team of experts who can help you with any concern on VAT rates and will be able to give you sound advice on what to do next.

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