VAT
Value Added Tax (VAT) is a consumption tax levied at each stage of the UK supply chain. VAT is a key consideration for business, as the payment and refund of VAT can have a significant impact on cash flow.
Businesses registered for VAT must charge VAT at the appropriate rate on their supplies (output tax) and, they can then claim back VAT on business expenses incurred by them (input tax).
An important question faced by business is to what circumstances can input VAT be reclaimed.
What are the Rates of VAT?
There are varying different rates of VAT depending on the supply, this includes:
- Standard rated – 20%
- Reduced Rate – 5%
- Zero-rated – 0%
Other supplies may be exempt or outside the scope of VAT.
Careful consideration should be given to what rate of VAT is applicable. A famous example being Jaffa Cakes – Cakes or Biscuits. The difference between the answer being that cakes are zero-rated and chocolate covered biscuits are standard rated.
Do I Need to Register for VAT?
The registration threshold, as of 1 April 2025, is £90,000. If taxable supplies will exceed this threshold in either the next 30 days or have exceeded in the last 12 months, you need to register for VAT.
However, if you can show then your supplies for the next 12 months will not exceed the deregistration threshold (£88,000 as of 1 April 2025), you are not required to register.
Standard, reduced, and zero-rated supplies are all included in the computation of taxable supplies.
Voluntary registration for VAT can be useful in a situation where it is thought that your customers can claim back VAT if it is charged to them because then your business will be able to claim back appropriate input VAT on its costs.
How can we help?
VAT can be concerningly broad and confusing. Some of the areas we regularly assist with include:
- Registration/Deregistration (both voluntary and compulsory) – we can assist with consideration of voluntarily or compulsorily registering for VAT and the implications therein. Also situations of late of incorrect registration for VAT
- Identifying the Correct VAT Treatment – we can help you determine what rate of VAT is applicable on supplies/services you provide and projects you are undertaking.
- Maximising reclaims of Input VAT
- Transfer of Going Concern (“TOGC”) – we can assist you in determining if the transfer of your business will be treated as a TOGC and the VAT benefits thereof.
- Option to Tax (“OTT”) – we can evaluate and determine if it will be beneficial to opt land or property to tax.
- Capital Goods Scheme (“CGS”) – we can help you understand the implications of this scheme and its implications for you. For example, on an exempt sale, we can advise on whether an OTT might prevent any re-clawing of input tax.
- The VAT Self-Build Scheme – If you are planning to build your own new house or convert a non-residential building for yourself or your relative to live in, you may be able to reclaim VAT on specific construction costs.
- VAT Groups – we can help you understand whether implementing a VAT group within your group of companies may be beneficial.
- The Flat-Rate Scheme – For those with turnover of £150,000 or less (ex VAT) this scheme is a possibility, and we can help you evaluate whether this is beneficial.
- Working with Partial Exemption Schemes
- Dealing with HMRC Enquiries into VAT
Why Stratos?
At Stratos, we provide clear, practical VAT advice to UK businesses at every stage of growth. VAT is complex, but with the right guidance it can also offer opportunities to improve cash flow and avoid costly errors.
We take time to understand how your business operates so we can deliver tailored VAT solutions, from registrations and planning, to property VAT and HMRC enquiries. Working closely with you and your existing advisors, we ensure your VAT position is compliant, efficient, and commercially sound. Our focus is on giving you confidence in your VAT affairs and helping you achieve the right outcome for your business.
FAQs
There are 5 conditions which determine where a supply merits a charge to VAT:
- There must be a supply of goods or services.
- The supply must be made by a taxable person (someone who should be VAT registered).
- The supply must be made in the UK.
- The supply must be in the course or furtherance of business.
- The supply must be taxable by definition (zero-rated, reduced rate, or standard rated).
Note that, generally, there should be consideration of one form or another.
If you are VAT registered, you can reclaim VAT on items you buy for use in your business via your VAT return. There are exceptions to this, such as client entertaining or goods or services used to make VAT exempt supplies.
Note that you cannot claim VAT back on items for personal use and, if the item is used partly in the business and partly for personal use, you can only claim the proportion of business use.
If you purchase goods or pay for services prior to VAT registration, it is possible to claim VAT back on them. For goods, you can go back 4 years providing you still have them, and, for services, you can go back 6 months.
However, if you use the flat rate scheme, you can only claim VAT back on purchases of certain capital assets which exceed £2,000 in value.
A VAT return is essentially a form you fill in and send to HMRC to explain how much VAT you’ve charged and how much you’ve paid to other businesses and can claim under the rules.
VAT returns need to be submitted every 3 months and are due to be submitted and tax paid 1 month and 7 days from the end of this 3-month period (unless you are within the payments on account regime).
All VAT registered businesses are required to submit VAT returns electronically barring a few exceptions. Businesses should sign up for HMRC’s VAT online service. Note also that payments should be made electronically also.
If you submit your VAT return late, you will incur penalty points. Once you reach a threshold (which varies depending on the length of your VAT accounting periods), you will receive a £200 penalty (and further £200 penalties for each further offense).
Note that records should be kept for at least 6 years.
The basic tax point for goods is the date the goods are delivered, made available, or collected and the basic tax point for services is the date the services are performed.
However, if there is a payment or invoice which precedes the basic tax point, this becomes the new tax point.
If there is no earlier point, and if there is an invoice issued with 14 days of the basic tax point, this becomes the new tax point.
Note that, where deposits are involved, the deposit and the payment of the balance each have their own tax points calculated as above.
The effect of an OTT is to turn VAT exempt supplies of an interest in land or buildings into standard-rated VAT-able supplies. Moreover, it allows you to recover any VAT incurred in making those supplies.
Generally, an OTT is best applied where there is an input tax advantage to be had. Note that an OTT can only be revoked in the first 6 months (where no tax has become chargeable on a supply of the land or building as a result of the OTT) or after 20 years – so it is a decision to be considered carefully.
Note that an OTT is not inherited by a purchaser of the land or building, and a new OTT should be made if the purchaser wishes to opt the land or property to tax.
Notification of an Option to Tax is often under consideration and discussion with HMRC.
The CGS applies to land or buildings that cost more than £250,000 excluding VAT. Essentially, the CGS is a method by which the amount of input tax reclaimed on purchase is in line with its taxable use. The number of adjustment periods for land or buildings is 10 years.
If the land or property is used solely to make taxable supplies, all the input tax on purchase will be deductible. However, if, in subsequent years, the land or property is used for some exempt purposes, adjustments will be made which will result in some input tax being repaid to HMRC.
Note that the CGS does also apply to computers, aircraft, ships, and boats with a value exceeding £50,000 in much the same way as above.
There are additional record keeping requirements if you are with the CGS on top of what is ordinarily required. Moreover, while VAT records are only required to be kept for 6 years, in this case, 10 years is recommended given the adjustment periods.
If you are building a new home, converting a property into a home, building a non-profit communal residence, or building a property for a charity, you may be eligible for the VAT self-build scheme (also known as the DIY housebuilders scheme).
If you completed work on or after 5 December 2023, you must apply no more than 6 months after finishing.
The purpose of the scheme is to ensure fairness when individuals undertake projects without using VAT-registered contractors. Essentially a claim can be made to recover the VAT costs incurred during the project.
If your business has a VAT turnover of £150,000 (ex VAT) or less, you can opt to use the flat rate scheme.
Essentially, you pay a fixed rate of VAT to HMRC – usually the difference between the VAT charged by your business to customers and the VAT your business pays on its own purchasers.
However, note that you cannot reclaim VAT on purchasers when on the flat rate scheme, except for certain capital assets over £2,000.
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Paul Davison
Director
Paul originally qualified as a Chartered Certified Accountant in 1996 and went on to specialise in corporate tax at Ernst & Young and later became a partner at an independent firm of tax advisors.
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