Once your business turnover reaches a certain level, you will have to register for VAT. This means that whenever you buy or sell anything in the course of your business, you will have to pay VAT to HM Revenue & Customs.

Even if your turnover is below the registration threshold you could consider registering voluntarily for VAT.

This guide aims to explain the basics of how VAT works, what you need to do to meet your obligations, and where you can go to get more information and advice.

How VAT works

Put simply, a business will pay VAT on its purchases, which is called input tax, and charge VAT on its sales, which is called output tax

If a VAT-registered business receives more output tax from sales than it pays in input tax on purchases, it must pay the difference to HM Revenue & Customs. If more input tax has been paid than output tax charged, HM Revenue & Customs will refund the difference to the business.

You can download the main guide to VAT from the HM Revenue & Customs website (PDF).

Compulsory VAT registration

You must register your business for VAT if you supplied taxable goods and services amounting to more than £60,000 in the last 12 month period, or if you anticipate supplying taxable goods and services amounting to more than £60,000 in the next 30-day period alone.

Certain types of goods and services are not taxable and are therefore exempt from VAT, for example, insurance, loans, or some types of education or training. If your business supplies only goods and services that are exempt, then you can't register and claim the VAT back on your purchases.

If you are still unsure, use our interactive tool to find out if you need to register for VAT. Otherwise you can register for VAT using form VAT1 on the HM Revenue & Customs website.

You can also download the main guide to VAT from the HM Revenue & Customs website (PDF).

Voluntary VAT registration

Businesses with a turnover below the registration threshold can register voluntarily. If you are considering voluntary registration you can get further information from the HM Revenue & Customs National Advice Service Enquiry Line on Tel 0845 010 9000 - or seek advice from your accountant.

Advantages

• Ability to reclaim some of your input tax.
• Increased credibility for your business - some businesses prefer dealing with suppliers with a VAT number.
• If your supplies are to other VAT-registered businesses then they can reclaim the VAT charged.

Disadvantages

• You will also need to start keeping VAT records, which will mean a lot more paperwork and fill in a regular VAT return with details of your sales and purchases.
• If your supplies are to the public or non-VAT registered businesses then they can not reclaim the VAT charged.

Sales and purchases

If you register for VAT, there are some changes you will need to make in the day-to-day running of your business.

For your sales:

• Starting from your date of VAT registration you will need to issue VAT invoices. For more details of what a VAT invoice should contain, see our guide on how to set up records and invoice correctly for VAT. You can also read important exceptions where full VAT invoices are not always necessary on the HM Revenue & Customs website.
• You will need to keep a record of the amount of VAT you charge in your records. This is your output tax.

For your purchases:

• You must have a VAT invoice for all your purchases to be able to reclaim any VAT paid. See our example of a completed VAT invoice.
• You will need to keep a record of the amount of VAT you have paid in a separate column in your records. This is your input tax.

Before you get your invoices printed, it's a good idea to check that they contain all the necessary VAT information.

Rates of VAT

Knowing how much VAT you should charge on a sale is an important part of meeting your VAT obligations.

There are three rates of VAT:

• a standard rate, 17.5 per cent
• a reduced rate, 5 per cent - see a list of goods and services currently charged at the reduced rate on the HM Revenue & Customs website
• a zero rate, 0 per cent - discover when to check if your goods and services are zero rated on the HM Revenue & Customs website

Certain goods and services are classed as exempt and no VAT is charged to the customer. Find out when your goods and services are exempt from VAT on the HM Revenue & Customs website.

The crucial difference between goods and services that are zero-rated and those that are exempt is that if your business supplies only goods and services that are exempt, then you can't register and claim the VAT back on your purchases.

If you are VAT registered and some of your purchases are used to make exempt supplies then you are classed as partly exempt. This means that you cannot normally reclaim all the VAT on your purchases. See our guide on when you can claim VAT and when you can't.

VAT returns and payments

Businesses usually account for VAT on a quarterly basis. When you register you will be assigned a tax period and HM Revenue & Customs will automatically send you a VAT return to coincide with the end of this period.

Alternatively, you can submit your return via the HM Revenue & Customs website and arrange for an electronic payment. If you enrol for this service, you will continue to receive a paper return (as a reminder) before your electronic return is due. Use our interactive tool to find out about the main online transactions you can make with government and read about and enrol for eVAT Services.

Your VAT return is used to detail the amount payable and how you have calculated it. For more information on filling in this form, see our guide on how to complete your VAT return.

Your completed VAT return and the payment for the tax is normally due one month after the end of your tax period.

You can download the main guide to VAT from the HM Revenue & Customs website (PDF).