5. September 2026

VAT - What do you need to know for your Business

Value Added Tax or VAT is a consumption tax that is applied to the sale of goods and services at each stage of production and distribution. It is used by many countries around the world; however, the rates and rules differ from country to country.

You will have most likely seen a tax breakdown on some of your receipts when you have made a purchase for goods or services, however you may have also seen that this is not the case for all.

There are a couple of reasons for this.

Firstly, not all businesses are required to charge VAT on their goods and services. The main reason that this would be the case is due to the mandatory threshold for VAT registration.

Businesses that have a turnover greater than £90,000 a year are legally required to register for VAT; this means that they must then charge VAT against sales of their goods and services. (There are some exceptions to this which we will cover shortly). Businesses that have a turnover of less than £90,000 therefore do not have to charge VAT on any of the goods and services that they provide, although if the business deems it beneficial, they can still voluntarily register for VAT if they are below the £90,000 threshold. There can be a few reasons for this, it can make the business appear more reputable if they are VAT registered, or they may buy in goods that they are then able to claim the VAT back on (again we will cover this in more detail shortly). If your business’ taxable turnover drops below £88,000 annually you are allowed to cancel your VAT registration voluntarily if you so wish.

As alluded to above if a business is either obliged to, or has voluntarily signed up for VAT registration, VAT does not have to be applied to the sale of all goods and services. The reason for this is that there are several rates of VAT that can be applied depending on the goods or services. In England there are three different rates that can be applied 20%, which is the standard VAT rate, the 5% reduced rate, or 0% for Zero rated or VAT exempt products/services.

VAT Rate Examples

20% VAT                – Standard rate, generally charged against most goods and services, hiring or loaning goods, selling business assets, commission all count as ‘Taxable Supplies’.

5% VAT                  - Reduced rate, charged mainly against Domestic fuel and power, children’s car seats and certain medical aids for people with disabilities.

0% VAT                  - Zero rated goods and services are things that are technically Vatable, this means that although the VAT rate charged against them is zero percent, businesses providing these goods or services are able to reclaim VAT on purchases that they have made in order to either produce the goods or provide their services. The main products that are rated zero % VAT is food (except for catering /alcohol/ confectionary/ crisps and snacks/ hot food/ sports drinks/ hot takeaways/ ice cream and soft drinks/mineral water), new construction projects, publications and children’s clothes, although there are more examples which you can find on the government website.

Exempt Goods    - Exempt goods, are goods that do not have VAT charged on them, but the main difference between zero rated goods and exempt goods is that businesses are not able to reclaim VAT on any purchases that they have made to produce the goods. Some examples of exempt goods or services are any form of gambling/betting, financial services or insurance. Again, there are further examples that can be found on the government website.

VAT Returns

As a VAT registered business, one of the things that you must do is to collect a VAT return every 3 months to HMRC, this is a report of all of the sales of Taxable supplies that the business has made with the relevant VAT rate that has been charged on the goods or services, their ‘Output Tax’. As mentioned above it is also a report of all the purchases of taxable supplies that the business has made, their ‘Input Tax, in the period as well. This is because the business can claim back the VAT on the purchases that his made, to offset the value of VAT charge on its sales.

If you charged more VAT on goods and services than you have paid out on purchases, you are required to pay the difference to HMRC. If, however, you have paid more VAT on your purchases than you have charged on your sales, HMRC will usually refund you the difference.

Based on the above there are a few things therefore that as a business you have a responsibility to do if you are VAT-registered. You must:

• Ensure that VAT is charged on the sale of goods and services and at the correct rates.
• Keep full records of VAT that has been paid for goods and services used in the business.
• Complete quarterly VAT returns reporting total VAT charged to customers and total VAT paid to suppliers.
• Pay any VAT to HMRC that is deemed to be due after completion of your VAT returns.
• VAT Schemes
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• To try to make things simpler for your business there are a few VAT Schemes that are available which may help to ease some of the administrative burden. These do not change the amount of VAT that businesses should charge on their goods and services, and it is also totally up to yourself as the business owner whether you wish to participate in any of the schemes as they are all totally voluntary.
• The first scheme which would be most suitable for new businesses is the VAT Flat Rate Scheme. The principal behind this scheme is that rather than recording total VAT charged to customers and deducting the total VAT paid to suppliers to come out with the difference you would either pay to HMRC or have paid back. All you need to do is apply a specific percentage to your annual sales and this is what you would then pay to HMRC as your VAT liability. This greatly simplifies the calculation of your total VAT due.
  The major things to consider with this scheme are that you are not able to claim back any VAT paid on purchases, however this is offset as the percentage that you apply to your sales would be less than the 20% standard rate that you would normally apply to general sales of goods and services. The specific percentage that you apply to your sales is determined by HMRC and is usually dependant on the nature of your business.
• For example:
• The VAT rate for Accountancy or Bookkeeping is 14.5%
• The VAT rate for Manufacturing food is 9%
• The VAT rate for Social Work is 11%
• As an example, if your business charged £2,000 to a customer for social work, you would apply the 20% VAT rate to the invoice, giving a gross sale of £2,400. You would then calculate your VAT by multiplying your relevant VAT rate (11% for Social Work) against the Gross Sale of £2,400. Giving VAT due of £264. In this example you would have collected VAT of £400 from the customer, but are only required to pay £264 to HMRC, and so have made a gain of £136.
• A full list of the different business types and their accompanying percentages is on the Government website.
• There are a couple of things that could also affect this percentage however, if your business is deemed to be a limited cost business, i.e. costs are less than 2% of your turnover or less than £1,000 a year (if your costs are greater than 2% of your turnover) you would need to pay a higher rate of 16.5% VAT to compensate for the reduced costs that you would need to claim for under the normal VAT process.
• The second thing that can affect your percentage of VAT is that if you sign up for the flat rate VAT scheme in your first year as a VAT-registered business, you will get an additional 1% discount on the VAT rate that you would need to use for your first year’s VAT returns.
• So, using the above business as an example this would mean that you would instead use the following percentages in your first year.
• The VAT rate for Accountancy or Bookkeeping is therefore 13.5%
• The VAT rate for Manufacturing food is therefore 8%
• The VAT rate for Social Work is therefore 10%
• There are some rules that will mean HMRC will block you from joining this scheme, the two main ones are for if you have previously left the Flat Rate Accounting Scheme within the last 12 months, or if you have been charged with a VAT offence in the last 12 months.
• The other thing to bear in mind with the Flat Rate Scheme is that you are still allowed to claim VAT on one capital asset costing £2,000 or more, which could make a significant difference if you needed to invest in new equipment in the year.
• There are two further VAT schemes that are most used to help to simplify your VAT calculations. For your business to be eligible for either of these schemes your taxable turnover must be less than £1.35 million per year.
• The first is the VAT Annual Accounting Scheme. Using this scheme, you would still need to calculate your VAT by working out the difference between VAT paid and VAT charged, however rather than needing to calculate this on a quarterly basis you would only need to complete this annually, thus reducing the administrative burden. You are however required to make payments throughout the year at either monthly or quarterly intervals with one final balancing payment required within two months of your VAT return. The monthly or quarterly payments are based on your previous year’s turnover, so if your business grows or shrinks you may find that you have either been underpaying or overpaying throughout the year, with either a large balancing payment required or a large refund due at the end of the year. For this reason, this scheme is most suited to businesses that have a steady revenue stream.
• The second is the VAT Cash Accounting Scheme. Using this scheme, you would only pay VAT to HMRC based on when you physically receive payments from customers rather than when you would invoice them. This could potentially aid with a business’s cash flow if your customers pay you using specific credit terms. It would also mean however that on the same principle you are only able to reclaim VAT on purchases when the money has left your bank account.
• There are a few areas which would not fall under this scheme and they are as follows:
• Invoices raised in advance of any work being completed
• Invoices with payment terms of 6 months or more
• Goods moved out of a customs warehouse
• Goods brought into Northern Ireland from the EU
• Goods bought or sold under hire, lease, conditional sale or credit sale deals
• All these scenarios would have to be treated under the normal standard VAT accounting scheme.
• The other thing to be aware of is that you cannot use the Cash Accounting Scheme and the Flat Rate Accounting Scheme simultaneously, you can only use one or the other.
• Hopefully the above breakdown will improve your understanding of Value Added Tax and allow you to make decisions on how you handle VAT that suit your business the best.