Everything you need to know about VAT (Value Added Tax) in the UK

Consultants collaborating in a modern office environment
VAT - Value Added Tax Return

In this blog, we cover the operation of Value Added Tax in the United Kingdom. The blog is a bit long so we have broken it down into the following bite-sized chunks:


Value Added Tax (VAT) is a sales tax added to most goods and services you will buy as a consumer. It was introduced to the UK in 1973. As a business owner, you will need to account for VAT and follow HMRC’s rules. As accountants, you will need to ensure your clients comply with these rules or expect some heavy fines and penalties. HMRC is introducing a new penalty regime from 1 January 2023 which you will need to be familiar with.

Businesses must register for VAT if their VAT-taxable turnover is more than £85,000. A business can also decide to register for VAT on a voluntary basis even if the annual taxable turnover is less than £85,000.

What is the rate of VAT a business must charge on goods and services

There are three VAT rates – the rate you apply to your goods or services sales price depends on the nature of the goods or services your business supplies. Most businesses apply the standard rate of VAT at 20% – but there is also a reduced rate, a zero rate and some goods and services are exempt from VAT altogether.

The following table provides details about the rates of VAT and the goods or services affected by each rate. For a complete list of all VAT rates, you should check HMRC’s website by following this link.

  VAT rate Examples of goods and services affected
Standard Rate 20% Most goods and services
Reduced Rate 5% Some goods and services, e.g. children’s car seats and home energy
Zero rate 0% Most food and children’s clothes

Some goods and services are exempt from VAT, such as postage stamps, financial services and property transactions.

The zero rate of VAT means that the goods and services are subject to VAT though the rate is 0%. This is important because you still need to include the transactions on a VAT return. Exempt items – such as a donation to a Charity – are excluded from the VAT rules completely and aren’t included on any returns.

Which businesses must register for VAT?

If you are operating as a limited company or as a sole trader business, you will need to register for VAT if you meet certain conditions.

You must register for VAT if your taxable turnover is over £85,000. Taxable turnover is all turnover generated by sales that are not VAT-exempt. Turnover on which the VAT rate is zero is classed as taxable turnover. If your business is close to the registration threshold, you should monitor this closely to ensure you register with HMRC within 30 days of reaching the threshold.

The £85,000 VAT threshold is measured over a rolling 12-month period – it’s not linked to a tax year.

Businesses that do not meet the VAT threshold won’t charge VAT on the goods or services they sell – so they won’t need to register with HMRC. However, some businesses decide to register for VAT on a voluntary basis. This means while the threshold for registration has not been met, the business adds VAT to its sales and submits quarterly VAT returns to HMRC.

How do I register my business for VAT?

Most businesses can register for VAT online using the GOV.UK website. The business will then have a VAT online account (sometimes known as a ‘Government Gateway account’). Your business will receive a VAT certificate and a VAT number which must be included on its sales invoices from the date of registration.

What advantages are there if my business registers for VAT on a voluntary basis?

Some businesses decide to register for VAT when the annual taxable turnover is below HMRC’s threshold of £85,000. This can provide some advantages if most of your clients are VAT registered – it can raise the profile of your business if it is VAT registered. It’s also wise to register for VAT if you think your business turnover will increase in the near future to above the registration threshold. You will also be able to reclaim VAT on your business expenses.

What is the VAT flat rate scheme and when can I register for it

HMRC allows businesses with VAT turnover of less than £150,000 to register for the flat rate scheme for VAT. The £150,000 limit excludes the VAT you charge and you must apply to HMRC to be added to the scheme. You get a 1% discount if you’re in your first year as a flat-rate VAT-registered business.

The flat rate scheme involves the following:

  • you pay a fixed rate of VAT to HMRC which is less than the standard rate
  • you keep the difference between what you charge your customers and pay to HMRC as income to your business
  • you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000.

You may pay the ‘limited cost trader rate’ (which is 16.5%) if you only spend a small amount on goods – for instance, if your business is a service based such as a freelancer or a contractor.

You should always speak to an accountant or tax advisor to see if the flat rate scheme is suitable for your business.

How to calculate VAT

The VAT calculation is relatively simple. If you operate using the standard rate of VAT, you add 20% to your sales invoice when you send it to a client or sell goods.

Submitting a VAT return

All VAT registered businesses need to submit their VAT returns quarterly to HMRC online using a compatible software. You should speak to an accountant about the software best suited to your business needs and how you comply with these ‘Making Tax Digital’ requirements.

The deadline for submitting your return online is usually one calendar month and seven days after the end of an accounting period. This is also the deadline for paying HMRC.

Your VAT return will calculate the amount of VAT you have collected on behalf of the government through your sales (‘output tax’) and the amount you can reclaim for the expenses you have incurred for the VAT period (‘input tax’). If your output tax exceeds the input tax, you will need to make a payment to HMRC. If the input tax is greater than the output tax, HMRC will pay a rebate to your business.

How do I pay a VAT BILL?

Once you have filed your VAT return, and if a payment is due to HMRC, you must pay the amount you owe before the deadline stated on your VAT return. Most people pay online.

Fines and penalties

Late registration penalties

 Unless you have a reasonable excuse, HMRC will apply penalties if you don’t register for VAT when you should: The penalty is a percentage of the VAT unpaid as follows:

  • 5% if you registered no more than nine months late
  • 10% if you registered between nine and 18 months late
  • 15% if you registered more than 18 months late.

Fines and penalties for late submission of a VAT return and payment of VAT due are changing from 1 January 2023

 Until 31 December 2022, the late submission and payment of VAT returns incurs a surcharge, which is calculated as a percentage of the VAT due. Businesses receive a surcharge liability notice for the first default, and subsequent defaults are successively surcharged at 2%, 5%, and 10% up to a maximum of 15%. The surcharge imposed is a fixed amount for a late filing – it does not increase according to how late the return is submitted, and no interest is charged on late payments.

For VAT periods starting on or after 1 January 2023, the default surcharge will be replaced by new penalties if you submit VAT returns late or pay VAT late. There will also be changes to how VAT interest is calculated. Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.

Late submission penalties will work on a points-based system. For each VAT return you submit late you will receive one late submission penalty point. Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty points threshold will vary according to your submission frequency.

Submission frequency Penalty points threshold Period of compliance
Annually 2 24 months
Quarterly 4 12 months
Monthly 5 6 months

You will be able to reset your points back to zero if you:

  • submit your returns on or before the due date for your period of compliance — this will be based on your submission frequency
  • make sure all outstanding returns due for the previous 24 months have been received by HMRC.

If you do not pay your VAT on time from 1 January 2023

Late payment penalties from 1 January 2023 are shown in the table below.

Up to 15 days overdue No penalty if you pay the VAT you owe in full or agree to a payment plan on or between days 1 and 15.
Between 16 and 30 days overdue First penalty calculated at 2% on the VAT owed at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.
31 days or more overdue Businesses will receive a first penalty calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30.
Businesses will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

To give businesses time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January until 31 December 2023, if you pay in full within 30 days of your payment due date.

How late payment interest will be charged from 1 January 2023

From 1 January 2023, HMRC will charge late payment interest from the day your payment is overdue to the day your payment is made in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

How to deregister from VAT

If you have registered for VAT but your taxable turnover is £83,000 or less, you can apply to HMRC to deregister your business from VAT. If your business stops trading altogether, you should deregister from VAT in any event. You must notify HMRC within 30 days if you are no longer eligible for VAT.

You can apply to deregister online through your Government Gateway account. Your business will be deregistered when your new circumstances took effect – e.g. the day your business stopped trading.

From the date of deregistration, you must stop charging VAT, but you must retain your VAT records for six years, because HMRC may ask for them. You’ll need to submit a final VAT return for the period up to and including your deregistration date.

How Initor Global can help your business

Initor Global UK provides outsourced solutions to accounting practices and businesses across the UK. We can help you with VAT registrations, calculations, and VAT return filing. Our passion is to use smart technology to change and streamline the finance and tax processes. Please contact us at hello@initor-global.co.uk to arrange a consultation.

Alternatively, visit our website at initor-global.co.uk or call us 0203 519 2121.

Useful links to GOV.UK website about VAT

You may find the following to the government’s website to be useful.