This is a system that HMRC use to collect tax revenue on behalf of the Government. It’s probably one of the more complicated tax systems in the world, but on the whole VAT is typically applied to most goods and services provided in the UK.
When you are VAT registered you will need to charge VAT on things you sell which could makes you goods and services more expensive to your customer who isn’t VAT registered. However, this will mean you can claim back VAT on things you buy, so it’s not all bad.
There are several rates we use in the UK which are:
There are a few other terms you may have come across, such as Exempt or Outside The Scope, which goes to show it’s already starting to look complicated.
Besides the different rates, there are a couple of different schemes for how you account for your VAT. These are:
Again, there are a few more schemes, but these tend to be the main ones.
On top of all that, you have the option to report your VAT:
You will usually need to report your VAT 1 month and 1 week after the VAT period has ended.
For example, if your VAT period was the 3 months ended March (1st of January to 31st of March), then you would need to submit your VAT return no later than 7th of April to avoid late filing penalties.
If you are paying over VAT yourself, either by bank transfer or debit card for example, then this will need to clear and be in HMRC’s bank no later than 1 month and 1 week after the VAT return period.
If you sign up to HMRC’s Direct Debit scheme, then HMRC will take this 3 days later automatically, providing an incentive to set up a Direct Debit.
If you have sold more than £85,000 (as of the 2020/21 tax year) in the last 12 months, or you think this may breach this in the coming 12 months then you may have to register for VAT.
Some sectors of the economy are exempt from registering, like healthcare for example. The general rule however is that if you have sold, or expect to sell more than the current years threshold, you will most likely need to become VAT registered.