VAT – a summary

What Is VAT?

Scope of VAT

A transaction falls within the scope of VAT if:

• Goods or services are supplied

• The supply is made in the UK

• The supplier is a taxable person

• The supply is made in the course of business

If all these conditions are met, VAT rules apply.

Input Tax and Output Tax

• Output tax is the VAT you charge on your sales

• Input tax is the VAT you pay on business purchases

You collect output tax from customers and pay it to HMRC through your VAT return. Input tax can usually be reclaimed, meaning only the net VAT is paid to HMRC.

However, some VAT cannot be reclaimed, including:

• Most motor car purchases

• UK business entertainment for third parties

Types of Supplies

Taxable Supplies

• Standard-rated (20%)

• Zero-rated (0%)

• Reduced-rated (5%) for specific goods and services

Exempt Supplies

Exempt supplies are not taxable for VAT purposes.

Key distinction:

• Businesses making only exempt supplies cannot register for VAT and cannot reclaim input VAT

• Businesses making zero-rated supplies can and often should register to reclaim VAT

VAT Registration

Mandatory Registration

You must register if taxable turnover exceeds £90,000:

• Over the previous 12 months (looking back), or

• Expected in the next 30 days alone (looking forward)

Voluntary Registration

Businesses below the threshold may choose to register to:

• Reclaim VAT on costs

• Improve business credibility

Intending Traders

Businesses planning to trade can register in advance to recover VAT on start-up expenses.

Who Is a Taxable Person?

A taxable person includes:

• Individuals

• Partnerships

• Companies

• Charities, clubs, and associations

If an individual runs multiple businesses, all taxable supplies are added together when assessing VAT registration requirements.

VAT Administration

Once registered, businesses must:

• Submit VAT returns digitally

• Use HMRC-compatible software

• Pay VAT electronically

VAT returns are usually due one month and seven days after the end of each VAT period.

Alternative Schemes

• Monthly returns – useful for repayment businesses

• Annual Accounting Scheme – one return per year with instalment payments

• Cash Accounting Scheme – VAT accounted for when money is paid or received

Record Keeping

VAT-registered businesses must:

• Keep accurate digital records of all sales and purchases

• Maintain a VAT account summarising output and input tax

• Retain records for six years

HMRC does not provide free software, so suitable accounting software is required.

HMRC Inspections

HMRC may carry out VAT control visits to check:

• Accuracy of VAT returns

• Correct application of VAT rules

• Quality of record keeping

A successful inspection does not guarantee future compliance, so ongoing accuracy is essential.

Penalties and Offences

HMRC can impose penalties and interest for:

• Late VAT returns or payments

• Late registration

• Errors or inaccuracies

These penalties can be substantial and are avoidable with proper systems and advice.

Special VAT Schemes

Retail Schemes

Designed for retailers where item-by-item VAT tracking is impractical.

Flat Rate Scheme

Available to smaller businesses with turnover up to £150,000.

• VAT is paid as a fixed percentage of turnover

• Input VAT is not normally reclaimed

• Can simplify administration and, in some cases, reduce VAT payable

Making Tax Digital (MTD) for VAT

All VAT-registered businesses must:

• Keep VAT records digitally

• Submit VAT returns using MTD-compatible software

Exemptions are very limited and rarely apply.

How Applegrow Can Help

VAT compliance is complex but manageable with the right support.

Applegrow can assist with:

• VAT registration and deregistration

• Choosing the most suitable VAT scheme

• VAT-efficient accounting systems

• VAT return preparation and submission

• Resolving VAT disputes with HMRC

• Ensuring full compliance with MTD requirements

Correct VAT management protects cash flow and reduces risk.