VAT isn’t the simplest thing to get your head around, and at times the terminology makes it seem more complex. To help you make sense of it all we explain what HMRC mean by some of the most frequently used VAT jargon to help you get going.
There are different VAT accounting schemes available, which can affect the way that you report and pay VAT. Some VAT schemes do have eligibility criteria, but as long as you meet those, it’s usually up to you to choose the one most useful for your business. Learn more about the different VAT schemes and their requirements.
You can cancel your VAT registration if the business is no longer eligible or if it stops trading. Make sure you cancel your VAT registration within 30 days of becoming ineligible, or you might attract HMRC penalties!
Disbursements are things that your business spends money on, the cost of which you then recharge to your customer. They’re a bit different to expenses because they’re costs that you incur on behalf of your customer, rather than as a result of the service you offer. The difference between disbursements and expenses has implications for VAT.
Domestic reverse charge
With some goods and services it’s the customer’s responsibility, rather than the supplier’s, to account for VAT. This is known as the domestic reverse charge and applies to goods and services such as computer chips and emission allowances, as well as VAT-registered businesses in the Construction Industry Scheme.
This refers to goods and services which are outside the VAT tax system, that you can’t charge or reclaim VAT on. Charges outside the scope of VAT typically include charges made by the government, such as MOT testing or the London congestion charge. Another typical example is the wages that you pay to employees.
Registering for VAT tells HMRC that your business will now start making regular VAT submissions. You must register for VAT if:
Your business’s VAT taxable turnover is more than £85,000 in a 12-month period.
You expect your taxable turnover to go over £85,000 within the next 30 days
You can apply for a registration exception if your taxable turnover only goes over the threshold temporarily. Write to HMRC with evidence showing why you believe your VAT taxable turnover won’t go over the de-registration threshold of £83,000 in the next 12 months. HMRC will either confirm your exception or register you for VAT.
It’s normally compulsory to register your business for VAT once your taxable turnover reaches the registration threshold. The current threshold for the 2023/24 tax year is £85,000.
A VAT period is the timespan covered by your VAT accounting. For example, if you use the VAT Annual Accounting Scheme then there are 12 months in your VAT period. If you use the standard VAT accounting method, then each VAT period will cover one ‘quarter’ (the three-month period that you need to report on your VAT submission). It’s crucial to know what your VAT period covers, because this also affects your VAT reporting deadline.
The rate of VAT that registered businesses must charge on their sales depends on what taxable goods and services are involved:
Standard rate: This is the most common, and is 20%
Reduced rate: Charged at 5%, this applies to some goods and services, such as gas and electricity
Zero rate: VAT is charged, but at 0%
Some businesses find it useful to register for VAT even though their turnover is less than registration threshold. This is known as making a voluntary registration. There can be several reasons for doing this, including being more tax efficient.
VAT taxable turnover is the total value of your UK sales that aren’t VAT exempt, including:
Goods you hire or loan to customers
Business goods that you use for personal reasons
Goods which you barter, part-exchange, or give as gifts
Services you receive from businesses in other countries that you had to ‘reverse charge’
Building work over £100,000 which your business did for itself
Zero-rated means that the goods are still VAT-taxable but the rate of VAT you must charge your customers is 0%. You still have to record them in your VAT accounts and report them to HMRC. Examples include children’s clothes and shoes, or motorcycle helmets.
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About The Author
I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes!
Learn more about Dean.