VAT 101 for Small Businesses

6 years ago

Sage One AccountsWhat is VAT? Who needs to register for it? And what do VAT-registered businesses have to do?

VAT (Value Added Tax) is a tax which is added to the price of goods or services provided by ‘VAT-registered businesses’ in the UK. VAT is then charged when a VAT-registered business sells to another business or to a non-business customer.

You must register for VAT if your turnover of ‘VAT taxable goods or services’ supplied in the UK for the previous 12 months was more than £79,000 or you expect it to go over that threshold.

You can also voluntarily register for VAT if you are below the annual threshold but expect your turnover to exceed it over the next year.

For example, you may have seen prices for a service quoted as £100 + VAT, meaning the total price to the customer would be £100 + 20% VAT = £120. For goods sold in shops, the VAT is usually already included in the final price that you see on the bill.

VAT-registered businesses can also reclaim any VAT that they have paid when buying goods or services from others.

Put simply, if you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.

Who can and can’t register for VAT?

You can register for VAT if you are in business (HMRC defines this as ‘a continuing activity involving getting paid for providing goods or services in money or another form of payment such as in-kind or barter) and fall into one of these categories:

  • an individual
  • a partnership
  • a company
  • a club
  • an association
  • a charity
  • any other organisation or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc
  • a trust
  • a Local Authority

(For VAT purposes, the individual or organisation that is in business is known as a ‘taxable person’).

You can’t register for VAT if:

  • you only sell goods or services that are exempt from VAT
  • you aren’t in business according to the definition that HMRC uses (see above)

Even if your activities have the characteristics of a business, they might not be considered ‘a business for VAT purposes’ by HMRC if they are carried out infrequently, as a hobby or recreation or as an isolated instance. For example, ‘the one-off sale of personal belongings at a car boot sale or auction’ would not be classed as VAT-taxable but buying goods for resale on a regular basis is definitely a business activity’ according to the HMRC.

What do VAT-registered businesses have to do?

When you register for VAT with the HMRC you will be sent a VAT registration certificate which confirms your VAT number, your ‘effective date of registration’ and when to submit your first VAT Return and payment to HMRC.

Once registered, you must report to HMRC the amount of VAT you’ve charged and the amount of VAT you’ve paid through what’s known as a VAT Return which is usually due every 3 months (known as your ‘accounting period’.

The VAT Return records things like:

  • your total sales and purchases
  • the amount of tax you owe
  • the amount of tax you can reclaim
  • what your VAT refund from HMRC is

Note: You must send a VAT Return even if you have no VAT to pay or reclaim.

From the effective date of registration you:

  • must charge the right amount of VAT
  • must show the VAT information on your invoice
  • must show the transaction in your VAT account (a summary of your VAT)
  • must show the amount on your VAT Return
  • may be able to reclaim VAT that relates to these sales

Note: You need to know the right amount of VAT so you can charge it correctly and reclaim it on your purchases. If you pay the wrong amount of VAT on a purchase, you can’t claim all of the amount you’ve paid back.

VAT Rates

There are 3 different rates of VAT and you must make sure you charge the right amount:

Standard Rate (20%) – Most goods and services fall under this category unless they are classed as reduced or zero-rated (see below).

Reduced Rate (5%) – This not only depends on the item but also the circumstances of the sale. For example, children’s car seats and domestic fuel or power are always charged at 5%. Mobility aids for older people are only charged at 5% if they’re for someone over 60 and the goods are installed in their home.

Zero Rate (0%) – These goods are still VAT-taxable but the rate of VAT you must charge your customers is 0% and you still need to report them on your VAT return. Examples include:

  • books and newspapers
  • children’s clothes and shoes
  • motorcycle helmets

Sage One Accounts and VAT

As you’d expect, our Sage One Accounts software supports all major VAT schemes and allows you to submit a VAT Return to HMRC online via the Government Gateway in just 4 simple steps.

What’s more, because our Sage One Accounts software is cloud-based, we will automatically update the VAT rates to cope with any new legislation so you don’t have to worry about a thing. It also allows you to provide a login to your accountant or bookkeeper so they can go in and check your figures and make sure you are doing things correctly.

If you’re still not sure what to do, our VAT accounting software page is full of useful information and  a video (like the one below) and the low-cost monthly subscription (just £10+VAT per month) includes free 24hr telephone and email support should you need it.

Find out more and register for a FREE 30 day trial today at

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