VAT guide for UK business owners

Value Added Tax (VAT) is a tax on most goods and services sold by businesses. While it feels like a tax on businesses, it really isn’t. Instead, it’s ultimately paid by people living out their day-to-day lives.​​

Businesses act like tax collectors for the government – charging an additional 20% (or sometimes 5%) on top of each sale, which they later forward to HMRC.​​

A business’s process of forwarding the VAT to the government is called a VAT Return.​​

The standard rate of VAT in the UK is 20% for most goods and services. A reduced rate of 5% applies to goods and services such as children’s car seats and fuel for the home. There is also a zero-rate of VAT which applies to most food and to children’s clothes. Finally there are goods and services which are exempt from VAT all together, such as sports activities, betting and gaming or charitable fundraising events.​

To calculate the VAT inclusive price, simply multiply the price by 1.2 (standard rate) or 1.05 (reduced rate);  while for a VAT exclusive price, divide your price by 1.2 (standard rate) or 1.05 (reduced rate).​​

Our VAT calculator can calculate inclusive or exclusive prices (for 20% VAT). Feel free to bookmark if you regularly need to calculate this.​

We've got a whole article about VAT registration if you want to dive into this topic.​

To summarise:​

If your taxable turnover for the last 12 months goes over £90,000, or you expect your taxable turnover to go over £90,000 in the next 30 days, you must register for VAT. ​​

If your taxable turnover is under £90,000 per annum, VAT registration is voluntary. It could be a beneficial move for you if​:​

In cases where a business’s turnover is expected to only temporarily exceed the VAT registration threshold, the business can apply to HMRC for an exception to registration. This must be approved by HMRC and an exception from registration cannot be assumed. ​

As a business, you’re acting as one of the government's agents by collecting VAT on your product or service. At the same time, your business is also contributing VAT each time it buys something (and for most purchases, you’re eligible to have the VAT refunded).​​

At the end of each VAT period (usually every 3 months for most businesses in the UK), you need to calculate the difference between the amount of VAT you’ve collected and the amount you’ve paid on goods and services to figure out if you need to pay the balance to HMRC, or if you can reclaim the balance from HMRC.​​

If you are VAT registered, and your hourly rate is £100 per hour plus VAT. This means, your customers will pay £120 (£100 + £100 * 20%) in total to you for one hour of your service. If you purchased a new laptop for your business at the price of £1,200, the VAT component (£200) on this new laptop can be claimed back.​​

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In summary, as a business owner, ​

Zero-rated supplies are supplies that are subjected to a VAT rate of 0%. It’s different from exempt supplies (we will cover this in the next section) which doesn’t attract VAT in the first place. The most common zero-rated supplies relate to exported goods and most food and drink for human consumption. ​​

Even though the VAT rate is at 0%, you still need to include the transactions in your VAT return. ​ ​

It’s crucial to know that exempt supplies are different from zero-rated supplies. If a supply is exempt from VAT (such as education, training, or residential rental income), VAT is not charged, and you cannot reclaim VAT on related costs.​

Exempt supplies must still be reported in Box 6 of your VAT return (total sales excluding VAT), but they do not go in the VAT calculation. If all your sales are exempt, you cannot register for VAT and do not need to submit VAT returns.​

If you are a business making supplies of digital services to UK consumers, those supplies are subject to UK VAT. Therefore, digital service providers such as softwares, apps, ebooks, and subscriptions are subject to VAT if their income in the UK passes the VAT registration threshold of £90,000. As a business, these types of expenses can be claimed back. ​​

However, less well-known or smaller digital service providers may not be VAT registered so there will be no VAT to reclaim on these purchases. Nonetheless, you should still keep records (including invoices and receipts) of these transactions.​​

If you are a UK supplier of digital services to consumers outside the UK, then these supplies are not liable to UK VAT, but you may be liable to VAT in the country where the consumer is based.​

If your VAT-registered organisation receives a donation with ‘no strings attached’ it’s not subject to VAT. ‘No strings attached’ means the giver or payer has made a voluntary donation and expects nothing in return.​​

However, if a payment is made in exchange for goods or services (e.g., fundraising sales, event tickets, or guided tours), it is not a donation—it is a taxable supply. In this case, you must charge VAT if your organisation is VAT-registered and the supply is not exempt.​

Charities receive income from various sources. If a charity is VAT-registered, it must charge VAT on the sale of taxable goods and services, unless the supply is exempt. Exempt supplies, such as certain welfare services, are not subject to VAT, but the charity generally cannot reclaim VAT on related costs. As noted above, genuine no strings attached donations are outside the scope of VAT and do not contribute to a charity’s VAT registration threshold. However, if a payment is made in exchange for goods or services, such as fundraising sales or event tickets, it is considered a taxable supply, and VAT must be charged if the charity is VAT-registered.​

Charities can claim VAT relief on specific purchases, such as advertising, medical equipment, and fuel for qualifying use, even if they are not VAT-registered. To benefit from this relief, charities must provide suppliers with proof of eligibility, such as a VAT declaration or evidence of charitable status.​

VAT on property and land transactions can get complicated. But the general rule is residential property sales are exempt from VAT (except in the case of new build homes where they are zero rated). ​​

The sale of commercial land and buildings is exempt from VAT, unless it is new (less than three years old) or the seller has made an Option To Tax (OTT).  ​​

When you are buying or selling residential or commercial properties, it’s very important to run it past your accountant before signing any sale and purchase agreement because the cost of mistakes can be huge and difficult to make right. ​​

VAT-registered businesses must submit VAT returns to HMRC, usually every quarter, though some businesses may be on a monthly or annual VAT accounting scheme. Each return reports the VAT collected on sales and the VAT paid on purchases, with the difference being either payable to or reclaimable from HMRC.​

VAT returns and payments are generally due one calendar month and seven days after the end of the VAT period. For example, if your VAT period ends on 31 March, your return and payment must be submitted by 7 May. Businesses using Making Tax Digital (MTD) must file returns online through compatible software.​

Late filing or payment can result in penalties. Under HMRC’s penalty points system, businesses receive a point for each missed deadline, with financial penalties applying once a threshold is reached. Late payments may also incur interest and additional penalties, increasing over time if unpaid. Ensuring timely submission and payment helps avoid unnecessary costs and compliance issues.​

Managing VAT efficiently is crucial for maintaining compliance and optimising cash flow. Here are some best practices to ensure your VAT processes run smoothly:​

By using accounting software like Xero or QuickBooks and following these best practices, managing VAT becomes more efficient, less stressful, and ensures you stay compliant with HMRC regulations.​

You don’t necessarily need an accountant or tax agent to file your VAT returns. However, VAT compliance can be complex and time-consuming. Managing tax obligations on your own can also add unnecessary stress. Working with a professional can make the process easier, help you avoid costly errors, and free up your time. ​

Beany's team of accounting and tax experts can help with your VAT returns and everything else accounting related. Visit our VAT returns service page to learn more, or book a call if you want to discuss your accounting requirements and how we can help your business.​

At Beany, we help people make smarter decisions for their business and lifestyle through our responsive, friendly expertise.​