What is the UK VAT rate and what does it mean for small businesses?

VAT affects businesses of every size in different ways. As your business starts or grows, you will have to register for VAT, understand the UK VAT rate, and complete VAT returns.

VAT definition UK

VAT is a tax on consumer spending, and on imports. Businesses are required to register for VAT in the UK when their taxable income or supplies exceed a certain threshold, or when they are expected to do so. So-called ‘output’ VAT is charged during different stages of the supply chain. However, VAT-registered businesses can claim this charge back from HMRC when they complete their regular VAT returns. There are three rates of VAT in operation in the UK.

What is the UK VAT rate?

The standard UK rate of VAT is 20 per cent. This applies to the majority of goods and services. However, there are two other rates: a reduced rate of five per cent applies to things including children’s car seats and energy in the home, and the zero rate applies to things like food and children’s clothes.

Has there been a VAT increase?

The standard rate of UK VAT was increased to 20 per cent from 17.5 per cent in January 2011. There was widespread concern that retailers in particular would suffer as a result of the increase, but the government maintained that it was necessary and would bring in an extra £13 billion over the course of that Parliament.

VAT has remained static since that point, and as of January 2018 there is little indication that it will move in the immediate future.

Small business VAT explained

VAT is a key consideration for small businesses in the UK. Regardless of the size of your business, and even if you’re just starting out, you need to consider the impact of VAT.

There are three key ways in which VAT is likely to affect your business:

VAT registration

You are legally obliged to register for VAT if your VAT-able turnover exceeds £85,000 in a 12-month period. You must also register if you buy goods for more than £85,000 from VAT-registered suppliers in the EU, even if you only sell VAT-exempt goods.

However, you might also choose to register for VAT even if your turnover doesn’t reach the threshold. You might choose to do this for a number of reasons:

  • In order to give the impression that your business is larger than it is
  • In order to build trust in your business
  • In order to save money if you spend more on VAT than you take in

Charging VAT

Once you are VAT registered, you are obliged to add VAT to the cost of goods and services that are VAT taxable. You must display your VAT number on receipts and invoices.

However, you can also claim back VAT that you pay on goods and services for your business. When you come to pay your VAT bill, you will pay the difference between what you’ve taken in and what you’ve paid out.

You may also be able to backdate VAT claims for purchases made before the date of registration. You can do so for up to four years for goods that you still have, and for up to six months for services. However, these must be solely related to your business purpose.

It’s crucial that you keep proper records for VAT. These include invoices and receipts, description of use, and, for backdated claims, details of how the purchases relate to your business now.

VAT returns

Once you’re registered for VAT, you’ll need to complete regular VAT returns. You will normally do this once every three months; this is known as your accounting period.

In your VAT return you’ll record your sales and purchases, plus the amount of VAT that you owe and what you can reclaim. You’ll then see whether you are due a refund or must make a claim.

There is guidance for calculating VAT on specific items, such as cars and travel expenses. You can find the guidance here. At every stage, you must remember that you can only reclaim VAT on purchases that are made for your business purpose.

Filing and payment deadlines will be available in your online VAT account, but you’ll usually have to submit your return one month and seven days after the end of each accounting period.

You will also have to make payment on this day. You must pay HMRC electronically; cheques are no longer acceptable from most businesses.

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