What is VAT & 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.

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Do you need to register for VAT

woman standing in a shop learning about what VAT is
Yes, if yearly turnover is £85K or more.
Optional if yearly turnover is less than £85K.

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

Registering for VAT

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

 

Adding VAT to your prices

Calculator showing how to find out what the VAT inclusive price is

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)

Issuing tax invoices

vat 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

More on VAT invoices in Xero’s VAT guide

Recording VAT

recording what vat was collected on sales and what vat was paid on purchases

 

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.

Preparing a VAT return

prepare VAT return from VAT collected and VAT paid

 

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.

lightbulb

VAT tip

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

seven

VAT due dates

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

calendar for VAT due dates

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VAT cheat sheet

Make VAT less taxing

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

Simplify VAT
devices showing Xero making VAT less taxing