The Ultimate Guide to VAT Compliance For UK Businesses

Before we dive into the finer details about VAT compliance and how to avoid common issues, it is important to understand how VAT works. Value Added Tax (VAT) is a tax that is applied to both goods and services in the UK. This guide covers everything you need to know about VAT, including registration, rates and filing requirements.

Who Needs To Register For VAT?

The reason the UK government adds VAT to goods and services is to generate revenue. VAT is added to a product or service at each stage of its production or distribution, not just at the final purchase. Businesses charging VAT on goods and services they sell can then reclaim VAT back against their own purchases. Therefore, VAT is essentially a tax on the final consumer.

Any business owner who has an annual turnover that exceeds the VAT threshold limit (currently sitting at £85,000) needs to register for VAT with HMRC. You are also able to voluntarily apply if your turnover is below that threshold. Once your business becomes VAT registered, you will need to charge VAT on your sales and also pay VAT on your purchases. You will also be required to file regular VAT returns with HMRC.

Different Types of VAT Rate

Before you start charging VAT on your goods or services, it is essential to understand the three different types of VAT rate:

1. Standard Rate (20%)

This applies to the majority of goods and services, including things like: electronic goods, clothing and footwear (adults only), vehicles and fuel, most services such as legal & accounting, advertising and consultancy services.

2. Reduced Rate (5%)

The reduced rate of VAT is applied to specific goods and services, which includes: domestic fuel & power (used at home), sanitary products – these are zero rated, energy-saving materials such as solar panels – these are zero rated until 31.03.2027, and certain types of repairs to private residences.

3. Zero Rate (0%)

The zero rate of VAT is charged on goods and services that are still subject to VAT, but the rate at which this is charged is 0%. This applies to the following items: food & drink, books, newspapers & magazines, children’s clothing & footwear, some medical supplies, some services related to international travel (flights & hotel accommodation).

It is also worth noting that there are some supplies that are exempt from VAT. Here are a few examples:

• Betting, gaming, and lotteries
• Burial, cremation, and commemoration of the dead
• Charities
• Clubs and Associations
• Competition in sport and physical recreation
• Education and vocational training
• Finance and securities
• Culture
• Health
• Insurance
• Investments gold
• Land and buildings

Managing Your VAT Returns

Registering your business for VAT is a fairly simple process. Once you have calculated your annual turnover and are over the £85,000 threshold (or you are opting to become VAT registered), you simply need to head over to the HMRC website and they will guide you through the stages. HMRC also gives you a list of items you will need to have to hand while registering for VAT too.

As a VAT-registered business owner, you will be required to file VAT returns with HMRC regularly. The frequency of your VAT returns depends entirely on the size of your business, and therefore the amount of VAT you are liable to pay.

It is important to keep track of your VAT deadlines as you will receive penalties and interest charges if you make late payments. The deadline for filing & paying your VAT return is usually one month and seven days after the end of your VAT period.

To complete a VAT return, businesses must calculate the total amount of VAT charged on sales, and subtract the total amount of VAT paid on purchases. If the result is a positive figure, the business will owe VAT to HMRC. If the result is a negative figure, the business will be due a VAT refund from HMRC.

Common VAT Compliance Issues & How To Avoid Them

Dealing with VAT can be complex, and if any mistakes are made throughout the filing process, they can be costly. We would always advise seeking the expert advice from an accountant to make sure your returns are completed efficiently and correctly.

Here are some common mistakes to avoid when submitting your VAT return (and how to avoid them!):

1. Not registering for VAT on time

As we have mentioned, you really need to keep an eye on your annual turnover and the second you think it may go over the £85,000 limit, you need to register your business for VAT. If you fail to register your business for VAT on time you may be liable to both penalties and interest charges.

2. Not charging the correct rate of VAT

The rate of VAT you charge depends entirely on the type of products or services that you sell. If you charge the wrong VAT rate again you could be liable to receive penalties and interest charges.

3. Keep accurate records

Keeping accurate financial records should be a high priority anyway, but businesses must keep accurate records of their VAT transactions too (both sales and purchases). Keeping inaccurate records can lead to errors and omissions on VAT returns, leading to penalties and interest charges with HMRC.

4. Not reclaiming VAT

It is important to remember that you can reclaim VAT back on eligible business purchases, both physical products and also services. While failing to reclaim these costs won’t leave you with any penalties, it can result in increased costs for the business.

5. Missing VAT return deadlines

In order to avoid penalties and interest charges it is essential that businesses not only submit their VAT returns on time, but also make VAT payments before the required deadline too.

6. Failing to notify HMRC of business changes

Businesses must notify HMRC immediately if there have been any changes to their business which may impact their VAT registration or VAT liability. Again, failure to notify HMRC can result in penalties and interest charges.

When it comes to VAT, every business should take their VAT obligations seriously and if you aren’t sure, seek professional advice. The interest charges and penalties can mount up incredibly quickly if you keep making errors, so don’t let your business get into that situation in the first place.