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What is VAT? A Practical Guide for Growing Businesses

Posted on by Bayley McTaggart
04
Mar

Value added tax (VAT) is a tax added to most products and services in the UK. 

Businesses add VAT to the price they charge consumers or other businesses they sell to, which they then collect and pass to HM Revenue & Customs (HMRC).

The current standard rate of VAT is 20%, though there is a reduced rate of 5% and 0% for certain goods and services, and some exemptions where no VAT applies.

VAT Registration: What It Means for Your Business

VAT registration is the process of formally notifying HMRC that your business is liable to charge VAT.

Once registered you must:

  • Add VAT to your prices when you sell goods or services to your customers. 
  • Display your VAT registration number on invoices
  • Submit VAT returns (usually quarterly) to HRMC
  • Pay any VAT owed by the relevant deadline

VAT returns calculate the difference between:

  • Output tax (VAT your charge your customers)
  • Input tax (VAT you pay on business purchases)

If you’ve charged more VAT than you’ve paid, you pay the difference to HMRC. If you’ve paid more than you’ve charged, you can reclaim the difference. 

Who Must Register for VAT?

You are legally required to register for VAT if your business’s taxable turnover exceeds £90,000 in any rolling 12-month period. 

Failing to register for VAT when your turnover grows beyond £90,000 could result in a significant fine from HMRC. 

This threshold exists to ensure businesses operating above a certain scale participate in the UK’s tax system appropriately.

Voluntary VAT Registration: Is It Worth Considering?

Even if your turnover is below £90,000, you can choose to register voluntarily. For many businesses, particularly those looking to grow, this can be a strategic decision. 

1.   Reclaim VAT on Business Costs 

If you’re investing in equipment, premises, or professional services, registering early allows you to reclaim VAT on those expenses. That cash can then be put straight back into your business to support growth.

For example, if you’re opening a café and purchasing tables, chairs, and coffee machinery, the VAT element on those costs can be reclaimed from HMRC, provided you are VAT registered. For a new business with significant upfront investment, this can make a meaningful difference to early-stage cash flow.

2.   Creditability 

Some suppliers and clients perceive VAT registration as a sign of an established business. Since, if you’re not VAT registered, it means your turnover is less than £90,000. 

While it doesn’t automatically signal size or success, it can enhance professional credibility, particularly in B2B sectors.

3.   Improving Financial Discipline 

Although VAT reporting adds administrative responsibility, it also encourages structured bookkeeping and regular financial oversight. This is something that supports better business decision making overall.

However, voluntary registration is not right for every business. If most of your customers are individuals (rather than VAT-registered businesses), charging VAT could make your prices less competitive.

 

Where Sawford-Bullard comes in 

At Sawford Bullard, we know VAT compliance can feel daunting. With Making Tax Digital (MTD) requirements and strict deadlines, it’s an area that often causes unnecessary stress.

With the right support and advice, VAT returns and HMRC queries become far more manageable.

We can assist with VAT registration and the preparation and submission of your VAT returns under MTD, ensuring you stay compliant and confident.

Bayley McTaggart