April 9, 2025
By Merranti

VAT (Value Added Tax) is a tax charged on most goods and services sold in the UK by VAT-registered businesses.

VAT FAQs for UK Businesses

A practical guide for small business owners, landlords, and freelancers

1. What is VAT and who needs to register for it?

VAT (Value Added Tax) is a tax charged on most goods and services sold in the UK by VAT-registered businesses. It’s collected at each stage of the supply chain and ultimately paid by the end consumer.

You must register for VAT if your VAT-taxable turnover goes over £90,000 in any rolling 12-month period (this figure is current as of April 2024). This includes income from standard, reduced, and zero-rated supplies but excludes exempt sales.

You can also register voluntarily, even if you’re below the threshold. This may be beneficial if your business incurs VAT on purchases that you want to reclaim.

2. What are the different VAT rates?

There are four VAT categories:

Standard rate (20%) – applies to most goods and services including professional services, electronics, and consultancy.
Reduced rate (5%) – used for specific items like home energy, mobility aids for the elderly, and children’s car seats.
Zero rate (0%) – items like basic foodstuffs, books, newspapers, and children’s clothes. Even though VAT is charged at 0%, these are still VAT-taxable supplies.
Exempt – services such as education, insurance, health services, and certain financial transactions. No VAT is charged, and you can’t reclaim VAT on related purchases.

Important: Zero-rated items are still considered taxable, which means you can reclaim input VAT, whereas exempt items are not taxable, and input VAT on these cannot be reclaimed.

3. What is the VAT Flat Rate Scheme and should I use it?

The VAT Flat Rate Scheme is designed to simplify VAT for small businesses. Rather than tracking the exact VAT on all purchases and sales, you:

Charge VAT at 20% on your invoices (as normal)
Pay a fixed percentage of your gross turnover to HMRC (this % varies by industry)
Do not reclaim input VAT on purchases (with limited exceptions, like capital assets over £2,000)

It can save time and may reduce VAT payments for businesses with low expenses, such as IT contractors, consultants, and designers. However, businesses with higher costs (like retailers or manufacturers) may not benefit.

You can join the scheme if your VAT-inclusive turnover is less than £150,000.

4. Can I reclaim VAT on purchases made before I registered?

Yes – HMRC allows VAT to be reclaimed on some purchases made before you became VAT-registered:

Goods: VAT can be reclaimed on goods purchased up to 4 years before registration, provided they are still in use by your business at the time you registered.
Services: VAT can be reclaimed on services up to 6 months before registration, as long as they relate to your business activities.

You must have valid VAT invoices and keep good records to support your claim. Reclaiming VAT pre-registration can result in a significant refund for startups or growing businesses.

5. What is Making Tax Digital (MTD) and how does it affect VAT?

Making Tax Digital (MTD) is HMRC’s initiative to digitalise the tax system. All VAT-registered businesses, regardless of turnover, must:

Maintain digital VAT records
Submit VAT returns using HMRC-approved accounting software

This became mandatory from April 2022, including for businesses that registered voluntarily. Penalties now apply if you don’t comply. Spreadsheets are allowed, but only if linked with digital bridging software. MTD aims to reduce errors and improve record-keeping efficiency.

6. What’s the difference between zero-rated and exempt supplies?

Zero-rated supplies (like food and books) are taxable, but at 0%. This means you can still reclaim VAT on related business costs.
Exempt supplies (like insurance and education) are not taxable, and you cannot reclaim VAT on associated expenses.

If your business only makes exempt supplies, you cannot register for VAT. However, if you sell a mix of taxable and exempt goods/services, you may be partially exempt (see question 10).

7. What should I do if I charge VAT by mistake?

If you mistakenly charge VAT on an exempt or non-taxable item, you are still required to pay that VAT to HMRC – even if you shouldn’t have charged it.

It’s essential to:

Identify errors quickly
Notify customers if you need to issue corrected invoices or refunds
Adjust your next VAT return to reflect the correction (if allowed)

Always double-check whether your goods or services are standard, reduced, zero-rated, or exempt to avoid this common error.

8. What happens if I miss a VAT return deadline?

Missing VAT return deadlines can result in:

Penalty points under the new MTD system
A £200 fine if you accumulate penalty points (e.g., 4 points for quarterly returns)
Late payment interest, charged at HMRC’s official interest rate

Timely filing and payment are essential. If you’re struggling to keep up, speak to your accountant or consider setting up direct debit payments to stay on track.

9. Can I charge VAT to overseas customers?

Yes – but the treatment depends on whether the customer is:

A business or a consumer
In the EU or outside the UK

For example:

B2B exports to the EU or outside the UK are usually zero-rated, but you must keep evidence that the customer is in business (e.g. their VAT number).
B2C services may still be subject to UK VAT unless the place of supply rules determine otherwise.

You must also be aware of EU VAT thresholds for digital services and Import One-Stop Shop (IOSS) rules when selling to EU consumers.

10. What is partial exemption in VAT?

If your business has both taxable and exempt income, you are classed as partially exempt for VAT purposes. This means:

You can reclaim all VAT on purchases related to taxable supplies
You cannot reclaim VAT on purchases related to exempt supplies
For general costs (e.g. rent, electricity), you may reclaim a proportional amount based on the ratio of taxable to total sales

You’ll also need to do an annual adjustment to true-up the amount you’re allowed to reclaim.

Need Help Navigating VAT?

Whether you’re a sole trader, landlord, company director or employer, getting your VAT right can make a big difference to your tax efficiency and compliance.

Let Merranti Accounting help you stay ahead.

📞 Call us today on 01342 836 557
📧 Or email us at contactus@merranti.com

Our expert team will help you:

Understand your obligations
Minimise your tax liabilities
Stay fully compliant with HMRC