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What is VAT?


What is VAT?

Most people actually forget we pay tax on most of the things we buy day to day. This is often referred to as sales tax, VAT, or value added tax.

Where did VAT come from?

While VAT is the third biggest income source for HMRC, it's still quite new. First introduced as a 10% tax on all goods and services sold when the UK joined the EU. Later, HMRC introduced different rates for different types of goods.

While some items are VAT-Free (e.g. food and books), others are more expensive (e.g. petrol and luxury goods).

Most goods and services sold in the UK are currently charged at 20% VAT.

What are the different VAT rates?

The UK has three different VAT rates:

  • 20% - this is the standard rate and applies to most things

  • 5% - this is the reduced rate and applies to things like children's card seats and solar panels

  • 0% - this is the zero rate and applies to most foods and things like children's clothing

You can check all the different categories that HMRC uses for each rate on here (link)

When do you charge VAT as a business?

Luckily, most businesses in the UK only need to worry about VAT if sales are (or expected) to be over £85,000 a year.

If you have sales of less than £85,000, you do not need to charge any VAT on what you sell. This means means sell at a 20% discount compared to companies that do need to pay VAT.

If you make sales of over £85,000 (or if you expect to go over), you need to register for VAT and start charging VAT to your customers.

How do you register for VAT?

You can register with HMRC online, through an accountant, or by post.

  • Online → This is the easiest and cheapest option. If you've already registered your business with HMRC, you can register for VAT via the this link.

  • Through an Accountant → The most expensive way is to use an accountant. While they can give you more guidance, they will go through the same steps as an online VAT registration.

  • By Post → If you prefer more traditional methods, you can send a paper version to HMRC. Use this link to view the form.

Once registered, you'll likely receive your certificate and VAT number within 30 days.

Why would I want to register for VAT if I don't have to?

The key benefit of being VAT registered is that you can claim back the VAT you pay on things you buy for your business. This means that you can save up to 20% on anything you use for your business, from laptops to raw materials like paper.

While this can help save a bit of money,  it also means that you now  need to pay 20% of all your sales to HMRC.

Apart from registering and paying VAT, do I need to do anything else?

You'll need to submit a VAT Return every 3 months. Which means sharing all your sales, purchases, VAT you owe on things you sold, and VAT you can reclaim on the things you bought. You can think of it as being a bit like a quarterly tax return.

If you're not quite ready to do all this yourself, tools like Earnr can help you with staying on top of your tax responsibilities for your business. While we don't help with VAT returns quite yet, we still help you understand when you should consider registering for VAT.

Download earnr