What you need to know about VAT

by Startacus Admin
VAT can be very frightening for anyone who runs their own small business, especially if you’re already VATstruggling with paperwork and wondering what you should be telling the taxman.
So what is VAT, does it affect you, and - if so - how do you register for it? Emily Coltman FCA, Chief Accountant to FreeAgent - which provides an award-winning online accounting system for small businesses and freelancers – explains more.
A quick introduction
VAT is short for Value Added Tax - or as I like to call it, Very Awkward Tax - and it’s a tax that’s charged on most sales of goods and services in the UK.
When your business makes sales, you don’t charge VAT to your customers unless you’re registered with HMRC to do so. Sales on which VAT would normally be charged are called “taxable sales”. Sales that are exempt from VAT, or outside the scope of UK VAT, are not taxable sales.At present you only have to register your business if its annual taxable sales are over the limit set by HMRC which, as of April 1st 2014, is £81,000.
When your business makes sales, you don’t charge VAT to your customers unless you’re registered with HMRC to do so. Sales on which VAT would normally be charged are called “taxable sales”. Sales that are exempt from VAT, or outside the scope of UK VAT, are not taxable sales.
At present you only have to register your business if its annual taxable sales are over the limit set by HMRC which, as of April 1st 2014, is £81,000.
Do I need to register for VAT?Do I need to register for VAT?
If your annual taxable sales are above £81,000 per year, or they will pass that limit in the next 30 days, then you must register for VAT (this is called compulsory registration).
In some cases you may also wish to register earlier - which is called voluntary registration. Registering before you have to do so can help your cashflow, because being registered for VAT allows your business to claim back input VAT on its costs (we’ll explain more about this later).
However if your customers are members of the general public or small businesses who aren’t registered for VAT themselves, it may not a good idea to register voluntarily, as you would have to charge them VAT which they wouldn't be able to claim back. This could mean that your customers might feel your prices are higher.
You can register for VAT either by filling in a paper form or registering online. If HMRC accept your application for registration, they will send you a certificate confirming this, which will also show your business’s unique VAT reference number.
OK, I’m registered - what next?
Once your business is registered for VAT, then it has to charge VAT on all the taxable sales it makes to its customers. The VAT you charge to your customers is called “output VAT”.
Your business will also be able to reclaim some of the VAT that its suppliers charge. (I say “some” advisedly, because there are some supplies on which VAT can’t be reclaimed, such as entertaining anyone other than staff). VAT that can be reclaimed is called “input VAT”.
VAT-registered businesses must file a regular report called a VAT return to HMRC. Your VAT return shows your business’s output VAT, less its input VAT - and the difference is what you must pay to HMRC.
If your input VAT is greater than your output VAT, lucky you – you’ll get a refund from HMRC!
Managing the transition period
You apply to be registered for VAT as from a certain date. There will usually be an interim period between that date and the arrival of your certificate and VAT registration number.
You’ll have to charge output VAT on any sales after your registration date – but until your VAT registration number arrives, you can’t issue official VAT invoices.
Reached an impasse? What you’ll need to do is add the relevant rate of VAT - usually 20% - to the total value of all your invoices as from the date you’ve applied to be registered from, so that you don’t have to go back and ask your customers for more money.
Once your VAT registration number comes through, you’ll then need to re-issue any invoices you’ve issued in the interim period to your customers. This is so that your customers have official VAT invoices and can reclaim input VAT on the goods or services they’ve bought from you, because HMRC say that you can’t reclaim VAT unless it’s shown on a proper VAT invoice.
Remember that VAT can be exceptionally confusing, so if you have any queries about VAT and how it affects your business in general, you should check with HMRC or speak to your accountant for more advice.
Emily Coltman FCA is Chief Accountant at FreeAgent, which provides the UK’s market-leading online accounting system for small businesses and freelancers.
Subscribe to our newsletter
If you would like to receive our startup themed newsletter, full of the latest startup opportunities, events, news, stories, tips and advice, then sign up here.
The lowdown on OneThird, the foodtech startup that's tackling food waste via its innovative solution for predicting the shelf life of fresh produce.

Karen Meager, co-founder of Monkey Puzzle Training shares some insights on how leadership has changed in the last decade, and what it takes to be a great leader today.

Freight rate management platform Freightify raises Series A investment to support further international growth and mission to help more freight forwarding companies digitize their operations.

Crowdfunding success for Omni, the vegan dog food brand, reaffirms the recession-proof growth of the pet nutrition industry.

Want to learn a new language? Weeve is an innovative startup that has created an innovative, creative and effective way to help you do just that.

Want to build an investable, scalable tech startup? The Raise Accelerator programme is now open for applications and will help you do just that.

Want to increase visual engagement for your startup's Instagram account? These tips will help you do just that.

Fashion innovation thanks to Italian Artisan and its B2B one-stop marketplace that connects international brands with hard-to-get authentic artisans.

Want to gain an edge over your business competitors? Listening to your audience is an absolute must.

The Clothes Doctor mission to fight fast fashion continues as the innovative eco clothing care brand raises £1m to support further growth.
Published on: 21st April 2014
If you would like to enable commenting via your Startacus account, please enable Disqus functionality in your Account Settings.







- Freightify secures $12M funding round to power digital transformation for freight forwarders 2nd Feb 2023 Freight rate management platform Freightify raises Series A investment to support further international growth and mission to help more freight forwarding companies digitize their operations.
- Vegan Dog Food Brand, Omni Smashes £400K Crowdfunding Target 1st Feb 2023 Crowdfunding success for Omni, the vegan dog food brand, reaffirms the recession-proof growth of the pet nutrition industry.
- Raise Spring Accelerator programme seeking applications for next cohort 30th Jan 2023 Want to build an investable, scalable tech startup? The Raise Accelerator programme is now open for applications and will help you do just that.
- Leading French Travel Co. Offers Mentoring to two UK startups on its prestigious two-month programme 23rd Jan 2023 High-potential social impact startups from the UK sought for the 9th annual Les Tremplins by Voyage Privé programme.