UK VAT & Tax Notes

The VAT registration threshold sits at £90,000 of taxable turnover, and most businesses treat it as a line to avoid crossing. That instinct is often wrong. Voluntary registration, signing up before you must, can put real money back in the business. Here is how to think about it properly. The core test: who do you sell to If your customers are VAT-registered businesses, registration is usually a win. You charge VAT, they reclaim it, and you reclaim the VAT on your own costs. Nothing changes for them and your input VAT becomes recoverable. If your customers are consumers or exempt businesses, registration adds 20 percent to your prices with no recovery for them, which is a much harder sell. Reclaiming VAT on costs and assets Businesses with heavy input VAT, stock, equipment, subcontractors, or a fit-out, feel the benefit fastest. There is also a useful look-back: on registration you can generally reclaim VAT on goods bought in the previous four years (still on hand or used in the bu...

  Charities live in a strange corner of the VAT system. They are not exempt from VAT as organisations; instead, specific supplies to and by charities get special treatment. The result is a set of reliefs that are genuinely valuable, and genuinely easy to miss. Here are the ones worth knowing. Zero-rated supplies to charities Charities can buy certain goods and services at the zero rate. The big ones: advertising services supplied to a charity, goods donated to a charity for sale or export, equipment designed solely for disabled people, and the construction of a new building intended solely for charitable use. The charity must give the supplier a declaration confirming its charitable status and the qualifying use; without that certificate, the supplier must charge VAT as normal. The charity shop rules Donated goods sold by charities are zero-rated, which is why charity shops work as a VAT-efficient fundraising channel. But bought-in goods sold in the same shop are standard-rated. Ma...

VAT cash accounting scheme: who qualifies and when it helps cash flow   Pay VAT when you are paid, not when you invoice Under standard VAT accounting, output VAT becomes due on the invoice date. Issue a £120,000 invoice on 28 March and the £20,000 of VAT belongs on the March quarter return, even if the customer pays in June. For businesses with long payment terms, that means funding HMRC out of their own pocket. The cash accounting scheme fixes exactly this: you account for VAT when cash actually moves, paying output VAT when customers pay you and reclaiming input VAT when you pay suppliers. Who can join the scheme The entry test is turnover-based. You can join if your estimated VAT taxable turnover for the next 12 months is £1.35 million or less. Once in, you must leave the scheme if turnover exceeds £1.6 million, and you must be up to date with your VAT returns and payments to join in the first place. There is no application form: you simply start using cash accounting from th...

  The VAT flat rate scheme used to be the small business favourite: one simple calculation, no digging through receipts for input VAT, and for many traders a nice little margin kept from the difference between what they charged customers and what they paid HMRC. Then came the 2017 limited cost business rules, and the scheme's appeal collapsed for a lot of users. So in 2026, who should still be on it, and who is quietly overpaying? A quick refresher on how it works Under the standard VAT rules, you charge 20% on your sales, reclaim the VAT on your purchases, and pay the difference to HMRC. Under the flat rate scheme, you still charge 20% on your sales, but you pay HMRC a fixed percentage of your VAT-inclusive turnover instead, and you do not reclaim input VAT (except on certain capital assets over £2,000). The fixed percentage depends on your trade sector. HMRC publishes a long list: IT consultancy at 14.5%, management consultancy 14%, hairdressing 13%, retailing food 4%, and so ...

Postponed VAT Accounting for Importers: The Monthly Routine Postponed VAT accounting, often shortened to PVA, changed life for UK importers when it replaced paying import VAT at the border. Instead of handing over cash at the port and reclaiming it later, you declare the import VAT on your VAT return and recover it on the same return. Done properly, it is a cashflow win. Done sloppily, it is a compliance mess. Here is the monthly routine that keeps it clean.   What PVA actually does Under PVA, when goods arrive from outside the UK, you do not pay import VAT upfront to HMRC or to your freight agent. Instead, you account for the import VAT in box 1 of your VAT return as output tax and simultaneously reclaim it in box 4 as input tax, provided you are entitled to full recovery. For a fully taxable business, the two entries cancel each other out, which means no cash leaves the business at the point of import. You do not register separately, but your freight or customs agent must b...

By John Thomas, Senior Accountant You did the work, you issued the invoice, you accounted for the output VAT, and the customer never paid. Under standard VAT accounting, you paid HMRC VAT on money you never received, which adds insult to injury. VAT bad debt relief exists for exactly this situation: it lets you reclaim the VAT you accounted for on unpaid invoices. Many businesses never claim it, either because they do not know it exists or because the conditions seem fiddly. They are not. How the relief works When you issue a VAT invoice under standard accounting, you declare the output VAT on your return for that period, whether or not the customer has paid. If the debt later goes bad, bad debt relief lets you reclaim that VAT, effectively unwinding the output tax you paid on income you never received. The relief is claimed on the VAT return for the period in which the conditions are met, as an increase to your input VAT. There is no separate form and no need to ask HMRC's per...

  By John Thomas, Senior Accountant "2.5% discount if paid within 14 days." It is a common line on UK invoices, and it is where a surprising number of sellers quietly get their VAT wrong. The rules on VAT and early settlement discounts changed in 2015, and HMRC still finds businesses applying the old treatment. Here is how it works now, the mistakes to avoid, and how to document discounts properly. What the old rule used to say Before 1 April 2015, VAT on supplies with a prompt payment discount was calculated on the discounted price, even if the customer never took the discount. You invoiced £1,000 plus a 2.5% early-payment option, and accounted for VAT on £975 regardless of what the customer actually paid. It was simple, and it no longer applies. The current rule: VAT follows what the customer pays Since April 2015, VAT is accounted for on the amount the customer actually pays. If the discount is taken, VAT is due on the discounted price. If it is not taken, VAT is...

If you work in construction and you are VAT registered, the domestic reverse charge changes how you handle VAT on most of your invoices. Instead of the supplier charging VAT and the customer reclaiming it, the customer accounts for the VAT themselves on their own return. Here is how the rules work in practice. What the reverse charge actually is Under the normal VAT rules, you add VAT to your invoice, collect it from your customer, and pay it to HMRC on your return. Under the reverse charge, which has applied to construction services since March 2021, the flow is different. The supplier issues an invoice with no VAT charged, and the customer records both the output VAT and the input VAT on their own VAT return. For most VAT-registered customers the two entries cancel out, so no extra VAT is actually paid. The idea behind it is fraud prevention. Construction supply chains were being used for missing-trader fraud, where VAT was charged and collected but never paid over. It applies to ...

The VAT Flat Rate Scheme: when it pays and when it costs The VAT Flat Rate Scheme promises simplicity: pay HMRC a fixed percentage of your turnover and stop worrying about reclaiming VAT on purchases. For some businesses it is also cheaper than standard VAT. For others it quietly costs thousands of pounds a year extra. The difference sits entirely in your cost structure, and you can work out which side you are on with a single worked example. The maths, worked through with real numbers Take a consultant with £100,000 of VAT-exclusive turnover. She charges 20 per cent VAT, so she collects £120,000 from clients including VAT. Her sector flat rate is 14.5 per cent, so she pays HMRC £17,400 (14.5 per cent of £120,000) and keeps a £2,600 margin to stand in for the input VAT she can no longer reclaim. If her actual VAT on purchases is less than £2,600 a year, she wins. If it is more, she loses. That is the whole scheme in one calculation: the margin between the VAT you collect and the fla...

  Partial exemption is one of those VAT topics that sounds like it only affects big businesses, until a small firm discovers it applies to them. If you make both taxable and exempt supplies, from rental income to certain financial services alongside your normal trade, you cannot reclaim all your VAT. You have to work out how much relates to the taxable side. Most small firms either ignore this entirely or overcomplicate it. There is a middle path. What Partial Exemption Actually Means When you incur VAT on costs, the reclaim depends on what the costs relate to. VAT on costs used only for taxable supplies is fully reclaimable. VAT on costs used only for exempt supplies is not reclaimable at all. VAT on shared costs, the overheads, has to be apportioned. That apportionment is the partial exemption calculation. The Standard Method, Simplified The default method compares your taxable supplies to your total supplies. If 80 percent of your turnover is taxable, you can generally recla...

When most businesses register for VAT, they default to standard VAT accounting without a second thought. Invoices are raised, VAT is accounted for on the invoice date, and that is that. But HMRC offers an alternative, the VAT Cash Accounting Scheme, and for some businesses it changes the cash flow picture significantly. Choosing the right scheme is one of those quiet decisions that either saves you money or costs you money for years. Here is how to think about it. How standard VAT accounting works Under standard accounting, you account for VAT when you issue an invoice (output tax) and reclaim VAT when you receive a purchase invoice (input tax), regardless of when the money actually changes hands. This is simple to administer and it matches how most accounting software works by default. The downside is the cash flow gap. If a customer takes 60 days to pay your invoice, you have already paid the VAT on that sale to HMRC. You are effectively lending the government money while you wai...

Most VAT-registered businesses make only taxable supplies and recover all their input VAT without thinking about it. But businesses that make both taxable and exempt supplies live under a different set of rules: partial exemption. And within those rules sits one of the most useful thresholds in VAT, the de minimis limit. What partial exemption means in practice When you make exempt supplies, you cannot recover the VAT on costs directly linked to those supplies. Costs that relate to both taxable and exempt activities must be apportioned, usually by turnover, so only the taxable share of input VAT is recovered. The de minimis rule: when small means recoverable If your exempt input VAT is small enough, HMRC lets you treat it as fully recoverable. The test has two limbs, and both must be met: (1) total exempt input VAT is no more than £7,500 per year (or £625 per month on average), AND (2) exempt input VAT is no more than 50 percent of your total input VAT. Meet both tests and you reco...

  The VAT flat rate scheme was designed to simplify VAT for small businesses: instead of tracking VAT on every purchase, you pay HMRC a fixed percentage of your VAT-inclusive turnover and keep the difference between that and the VAT you charged. Simple in theory. In practice, whether it still saves you money in 2026 depends entirely on your cost structure. How the scheme works, briefly You charge VAT at the normal rate (usually 20%) on your sales, but you pay HMRC a lower flat-rate percentage that depends on your business type. In your first year of VAT registration you get a 1% discount on the flat rate. You cannot reclaim VAT on most purchases, with an exception for certain capital assets over £2,000. The scheme is available to businesses with VAT-taxable turnover up to £150,000. It is a simplification scheme, not a tax break: the flat-rate percentages are set so that, on average, businesses pay roughly the same VAT as under standard accounting. The winners are businesses whos...