How Does VAT Work?

How VAT Works for UK Small Businesses

VAT (Value Added Tax) is one of the most common areas of confusion for small business owners. Many people aren’t sure when they need to register, how much to charge, or whether VAT will cost them money.

In reality, VAT is manageable once you understand the basics — and getting it wrong can be expensive. This guide explains how VAT works, when you must register, how VAT is charged, and what you need to submit to HMRC, all in simple terms.

What Is VAT?

VAT is a tax added to most goods and services sold in the UK. Businesses registered for VAT collect it from customers and pay it to HMRC.

If you’re VAT-registered, you:

• Charge VAT on your sales (output VAT)

• Reclaim VAT on business costs (input VAT)

• Pay the difference to HMRC

When Do You Need to Register for VAT?

You must register for VAT if your VAT-taxable turnover exceeds £90,000 in a 12-month period.

This isn’t based on the tax year — it’s any rolling 12-month period.

You can also voluntarily register even if your turnover is below the threshold, which can be beneficial in some cases.

What Happens Once You’re VAT Registered?

Once registered, you must:

• Charge VAT on eligible sales

• Submit VAT returns (usually quarterly)

• Keep digital VAT records

• Follow Making Tax Digital (MTD) rules

Failure to do this correctly can result in penalties and interest.

How Much VAT Do You Charge?

Most goods and services are charged at the standard VAT rate of 20%, but some are:

• Reduced rate (5%)

• Zero-rated (0%)

• Exempt from VAT

Knowing which rate applies to your business is crucial — charging the wrong rate is a common mistake.

What Is a VAT Return?

A VAT return is a summary of:

• VAT charged to customers

• VAT paid on business expenses

• The difference owed to (or reclaimed from) HMRC

Even if you owe nothing, VAT returns must still be submitted on time.

Can VAT Cost You Money?

VAT doesn’t usually cost businesses money directly — but it can affect:

• Cash flow

• Pricing

• Competitiveness

If your customers aren’t VAT-registered (e.g. the public), VAT increases your prices. If your customers are VAT-registered, VAT is usually neutral.

Common VAT Mistakes Small Businesses Make

• Registering too late

• Charging the wrong VAT rate

• Forgetting to submit nil returns

• Missing VAT deadlines

• Not keeping proper digital records

• Choosing the wrong VAT scheme

These mistakes often lead to avoidable penalties.

Do You Need an Accountant for VAT?

VAT rules can be complex, especially if you have:

• Multiple income streams

• Mixed VAT rates

• International transactions

• Rapidly growing turnover

Professional advice ensures compliance and helps you choose the most tax-efficient VAT approach.

How VIP Accounting Ltd Can Help

At VIP Accounting Ltd, we help small businesses across Benfleet, Essex and the UK with:

• VAT registration

• Choosing the right VAT scheme

• VAT return preparation and submission

• Making Tax Digital compliance

• Ongoing VAT advice and support

If you’re unsure whether you need to register for VAT or want help managing it properly, our team can guide you.

FAQs

Do I have to register exactly at £90,000?

You must register once your turnover exceeds £90,000 in any 12-month period.

Can I deregister for VAT?

Yes — if your turnover falls below the deregistration threshold.

How often are VAT returns submitted?

Usually quarterly, though monthly and annual schemes exist.

Can I reclaim VAT on old expenses?

In some cases, yes — depending on the timing and type of expense.

VIP Accounting Ltd is a strategic accounting and tax advisory firm based in Benfleet, Essex, supporting small businesses across the UK with VAT, accounting, Self Assessment, and full HMRC compliance