VAT Registration and VAT Returns: A Guide for Small Businesses

VAT is one of the taxes that catches growing businesses out most often. Register too late and you can end up owing VAT you never charged your customers. Register without understanding the rules and quarterly VAT returns quickly become a headache. This guide explains VAT registration and VAT returns for small businesses in Bristol and across the UK, in plain English.

When do you have to register for VAT?

You must register for VAT if your VAT taxable turnover goes over £90,000. There are two tests:

• Looking back: if your taxable turnover for the last 12 months goes over £90,000, you must register within 30 days of the end of the month in which you went over
• Looking forward: if you expect your turnover to go over £90,000 in the next 30 days alone, you must register by the end of that 30-day period

The 12-month test is a rolling one. It isn't based on your financial year or the tax year, so check it every month as you approach the threshold. You don't have to register if you only sell goods or services that are exempt from VAT or outside its scope.

Should you register for VAT voluntarily?

You can register for VAT even if your turnover is below £90,000. Voluntary registration lets you reclaim VAT on your business costs, and it can make a small business look more established. The downside is that you must charge VAT on your sales. If your customers are mainly VAT-registered businesses, that usually isn't a problem, because they can reclaim it. If you mostly sell to the public, it effectively makes you up to 20% more expensive, or cuts your margin.

VAT rates

• Standard rate: 20%, which applies to most goods and services
• Reduced rate: 5%, for example on domestic energy
• Zero rate: 0%, for example on most food and children's clothes

Zero-rated and exempt aren't the same thing. Zero-rated sales count towards your VAT turnover, and you can still reclaim VAT on related costs. Exempt sales don't count towards the threshold, and you generally can't reclaim VAT on the costs of making them.

How VAT returns work

Once you're registered, you'll usually submit a VAT return every three months, known as your accounting period. The return shows the VAT you've charged on sales and the VAT you've paid on purchases. The difference is what you pay HMRC, or reclaim if you've paid more than you've charged.

• The deadline to submit your VAT return online and pay HMRC is usually one calendar month and 7 days after the end of the period
• You must submit a return even if you have no VAT to pay or reclaim
• Your payment must reach HMRC by the deadline, even if it falls on a weekend or bank holiday
• VAT-registered businesses must keep digital records and file using software that works with Making Tax Digital

Late returns earn penalty points under HMRC's points-based system, leading to a financial penalty once you reach the threshold, and late payments attract penalties and interest. Setting VAT aside in a separate account as your customers pay you is the simplest way to make sure the money's there when the bill arrives. Good bookkeeping makes every VAT return quicker and more accurate.

VAT schemes that can make life easier

• Flat Rate Scheme: if your VAT turnover is £150,000 or less (excluding VAT), you pay HMRC a fixed percentage of your turnover instead of working out the VAT on every purchase
• Cash Accounting Scheme: if your taxable turnover is £1.35 million or less, you pay VAT when your customers pay you rather than when you invoice, which helps cash flow
• Annual Accounting Scheme: if your taxable turnover is £1.35 million or less, you make advance payments through the year and submit just one VAT return

Whether a scheme saves you money depends on your costs and your customers, so it's worth running the numbers before you join one.

VAT returns in Bristol and across the UK

We prepare and submit MTD-compliant VAT returns for small businesses across Bristol and the UK, advise on the right VAT scheme for your business, and deal with HMRC queries so VAT is one less thing to worry about. Find out more about our VAT returns service, or get in touch.