Guide

What is VAT and how does it work?

Not clear on your VAT commitments? Don’t stress. It’s not as tricky as you might think. Here’s what to focus on.

A small business owner filing VAT

1. Do you need to register for VAT

A small business owner registering for VAT and graphics indicating when to register

Yes, if turnover is £85K or more.

Optional if turnover is less than £85K.

(You can’t claim VAT on expenses if you don’t register.)

2. Registering for VAT

You can register online with HMRC. You’ll need a Government Gateway ID, National Insurance number or tax identifier, and bank account details.

3. Adding VAT to your prices

A calculator showing VAT calculations

Old price x 1.2 = VAT inclusive price (for 20% VAT). Old price x 1.05 = VAT inclusive price (for 5% VAT)

(No price change for 0% VAT)

4. Issuing tax invoices

A tax invoice

You’ll need to be able to issue VAT invoices, with extra details like:

  • your VAT number
  • the VAT rate
  • notes showing VAT has been charged

5. Recording VAT

Examples of how to record VAT

Keep a running tally of the VAT you’ve collected on sales.

Do the same for the VAT you’ve paid on purchases.

You’ll use these numbers to figure out your VAT bill or refund at step 6.

*You will most likely collect more than you pay.

6. Preparing a VAT return

A small business owner preparing a VAT return

Figure out your VAT bill (or refund).

£2819.74 – £1342.87 = £1476.87 (Money you owe HMRC.)

Now include this in your VAT return and file it online with HMRC.

VAT tip

Think of VAT as money you’re collecting for HMRC. Treat it as their money and you won’t get caught short.

7. VAT due dates

A calendar showing VAT due dates

Most businesses file quarterly. The due dates are shown in your online VAT account.

Make VAT less taxing

Learn how software can help with VAT invoicing, accounting, and filing.

Get this infographic and bonus ebook

Download our 'VAT cheat sheet' infographic, and get a bonus ebook about VAT.

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