VAT for businesses – frequently asked questions

Understanding VAT can be challenging for businesses of all sizes. From knowing when to register to working out which rates apply, there are many rules and exceptions to navigate. Below, we’ve compiled a comprehensive VAT FAQ to help business owners and finance teams understand their responsibilities, avoid common mistakes, and make informed decisions.

What is VAT?

Value Added Tax (VAT) is a tax charged on most goods and services sold in the UK. It’s collected at each stage of the supply chain, but ultimately borne by the end consumer. Businesses that are VAT-registered act as tax collectors on behalf of HMRC, charging VAT on sales (output tax) and reclaiming VAT on purchases (input tax).

When do I need to register for VAT?

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed this threshold in the next 30 days. This is known as compulsory registration. You can also register voluntarily even if your turnover is below the threshold, which can be beneficial if your customers are mainly VAT-registered or you regularly reclaim input VAT.

Businesses must monitor their turnover carefully each month. If you cross the threshold and fail to register on time, HMRC can charge penalties and backdate VAT liabilities.

What VAT rates apply to goods and services?

There are four VAT categories in the UK:

• Standard rate (20%) – applies to most goods and services.

• Reduced rate (5%) – applies to specific goods such as some energy-saving materials and domestic fuel.

• Zero rate (0%) – applies to certain items like most children’s clothes and books.

• Exempt – applies to specific services such as insurance, financial services, and health services.

Some transactions may also be outside the scope of VAT altogether (e.g. statutory fees or certain overseas services). Applying the correct VAT rate is crucial, as mistakes can lead to underpayments, overpayments, or compliance issues.

What is Making Tax Digital (MTD) for VAT?

Making Tax Digital (MTD) for VAT is a government initiative requiring VAT-registered businesses to:

• Keep digital VAT records

• Use MTD-compatible software to submit VAT returns

This applies to both compulsory and voluntarily registered businesses. Spreadsheets can be used, but they must be linked to compatible bridging software through digital links – not manual copy and paste.

Which VAT accounting schemes are available?

HMRC offers several schemes to simplify VAT reporting:

• Flat Rate Scheme – You pay a fixed percentage of your gross turnover as VAT, keeping the difference between what you charge customers and pay to HMRC.

• Cash Accounting Scheme – You account for VAT when you receive payments from customers and pay suppliers, rather than on invoice dates.

• Annual Accounting Scheme – You submit one VAT return per year with advance instalment payments, reducing admin.

Choosing the right scheme depends on your business’s size, sector, and cash flow. Using the wrong scheme or failing to apply correctly can cause unnecessary costs.

Can I reclaim VAT on all my purchases?

Not always. VAT can usually be reclaimed on business-related goods and services, but there are restrictions. You cannot reclaim VAT on:

• Business entertainment costs

• Personal use items

• Some exempt or partially exempt supplies (e.g. financial services, property transactions)

For businesses that make both taxable and exempt supplies, partial exemption rules apply. This can require complex calculations to determine how much input VAT can be recovered.

What happens if I make a mistake on my VAT return?

If you discover an error on a VAT return, you should correct it as soon as possible. Minor errors (under £10,000 or 1% of turnover up to £50,000) can be corrected on your next return. Larger errors must be reported separately to HMRC.

Penalties can apply depending on the size, nature, and timing of the error. HMRC tends to be more lenient if you voluntarily disclose mistakes early.

What is the VAT Capital Goods Scheme?

The Capital Goods Scheme (CGS) adjusts the amount of VAT reclaimed on certain high-value assets, such as property or equipment, over several years. If the use of the asset changes (e.g. from taxable to exempt), you may need to adjust your VAT recovery. This scheme typically applies to:

• Land and buildings worth over £250,000

• Computers and equipment worth over £50,000

Monitoring the use of these assets and if there is a change in use, it is essential to check if an adjustment is needed to avoid unexpected VAT liabilities.

How does VAT work for property transactions?

VAT on property can be particularly complex. Most sales and leases of commercial property are exempt, but businesses can opt to tax the property, charging VAT on rents or sales. This allows input VAT to be recovered but can have long-term implications. Expert advice is strongly recommended before making property VAT decisions.

What are the common VAT pitfalls businesses face?

• Late registration leading to penalties and backdated VAT

• Applying incorrect VAT rates to goods or services

• Not monitoring turnover regularly

• Failing to comply with MTD requirements

• Incorrect partial exemption calculations

• Overlooking VAT on property transactions

How can Lambert Chapman help?

Our VAT specialists support businesses at every stage, including registration, scheme selection, digital compliance, complex transactions, partial exemption, and HMRC investigations. We offer tailored advice to keep you compliant and efficient, helping you avoid costly errors.

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