Value Added Tax - a consumption tax charged on most goods and services in the UK at a standard rate of 20%. Businesses with turnover above £90,000 must register for VAT, file quarterly returns, and remit tax collected to HMRC.
VAT is the largest single tax bill for most UK small businesses above the £90,000 threshold. It's charged quarterly, so managing cash flow around VAT payments is critical. Underestimate your VAT and you can run out of cash before the bill is due. Miscategorise items as zero-rated when they're standard-rated and HMRC will charge interest and penalties on the shortfall.
For business owners, VAT is a compliance headache. It requires accurate record-keeping, timely filing, and quarterly payments to HMRC. But it's also invisible to customers (they pay it as part of the price), so many business owners don't realise the real impact until their first VAT return.
For accountants and bookkeepers, VAT is now a critical accuracy area. Making Tax Digital for VAT went live in April 2019 - all registered businesses now file quarterly VAT returns directly to HMRC via API. There's no room for paper forms, extensions, or manual filing. The deadline is fixed and HMRC penalises late returns immediately.
For cash flow planning, VAT is a double-edged sword. If you sell to other VAT-registered businesses, they can reclaim your VAT, so it's ultimately paid by the end consumer. But if you sell to consumers or non-VAT-registered businesses, you keep the VAT in your bank account until the return is due - at which point you must pay it to HMRC. This can be a significant cash outflow.
VAT is calculated and remitted quarterly. Here's how it works:
The formula:
VAT owed = Output VAT (VAT you've charged customers) - Input VAT (VAT you've paid on business expenses)
Registration threshold:
You must register for VAT if your taxable turnover in the previous 12 months exceeds £90,000. Once registered, you file quarterly VAT returns and charge VAT on most sales (with some exceptions - see below).
VAT rates:
Real example:
A web design agency with three clients for a quarter:
Expenses in the same quarter:
VAT due to HMRC: £2,000 - £700 = £1,300
The agency remits £1,300 to HMRC by the return deadline.
Zero-rated items:
If the agency had sold software to a UK school (zero-rated education), they would not charge VAT on that sale (output VAT = 0). But they could still reclaim VAT on their expenses, so VAT owed could be negative (a refund from HMRC).
Filing cycle:
Quarterly returns are due:
All returns now file electronically via Making Tax Digital. Late filing triggers automatic penalties.
VAT on import and export:
If you're selling to EU or international customers, rules are complex. Goods and services sold to other UK VAT-registered businesses within the EU fall under reverse charge rules. Goods sold to non-VAT consumers in the EU are typically charged VAT in the destination country, not the UK. Consult your accountant on cross-border transactions.
Partial exemption:
If you have both VATable income (standard/reduced/zero-rated) and exempt income (like financial services), you may not be able to reclaim all input VAT. Only the proportion of VAT related to taxable sales can be reclaimed. This is called "partial exemption".
Cash flow timing:
VAT is due quarterly, 1 calendar month and 7 days after quarter-end. If your business has a £15,000 VAT bill in January but customers don't pay until March, you might have to borrow to pay HMRC on time. Plan accordingly.
Invoicing requirements:
VAT invoices must show: your VAT registration number, the customer's details, the invoice date, a description of goods/services, the amount excluding VAT, the VAT amount, the total including VAT, and your payment terms. Missing details can invalidate the invoice for the customer's VAT recovery.
Record-keeping:
Keep invoices, receipts, and supporting documents for at least 6 years. HMRC can inspect these records at any time. Digital records are acceptable, but many businesses keep PDFs of paper invoices as backup.
Aarvo calculates your VAT liability automatically. Every invoice and expense is categorised by VAT treatment - standard, reduced, zero, or exempt. Aarvo then calculates your output VAT (what you've charged) and input VAT (what you've paid) each quarter.
Aarvo files your VAT return directly to HMRC via Making Tax Digital. You verify the figures, and we submit electronically. No spreadsheets, no manual calculations, no missed deadlines. Your return is filed on time, and HMRC acknowledges it immediately.
We also track your VAT liability throughout the quarter, so you can plan for the payment due date. If you owe £8,000 in VAT, you'll see it coming and can budget accordingly.
Sign up free and Aarvo handles VAT categorisation, calculation, and filing via Making Tax Digital.
VAT (Value Added Tax) is a sales tax applied to most goods and services in the UK. The standard rate is 20% - so if you sell a service for £100, you add £20 VAT and invoice £120. Some items are zero-rated (like food) or reduced-rate (5%, like children's car seats). VAT is collected from customers and remitted to HMRC quarterly.
Yes, if your annual taxable turnover exceeds £90,000, you must register for VAT within 30 days of crossing that threshold. If your turnover is below £90,000, VAT registration is optional - but some businesses choose to register anyway to reclaim VAT on their own expenses. Once registered, you file VAT returns quarterly and must charge VAT on most sales.
VAT owed is calculated as: VAT you've charged customers (output VAT) minus VAT you've paid on business expenses (input VAT). If you invoice £10,000 + £2,000 VAT and paid £500 VAT on supplies, you owe HMRC £2,000 - £500 = £1,500. If input VAT exceeds output VAT, HMRC refunds you the difference.
Most businesses file quarterly returns. Returns and payment are due 1 calendar month and 7 days after the quarter-end. For a business with standard calendar quarters, that means 7 May, 7 August, 7 November, and 7 February. Late filing triggers automatic HMRC penalties.
VAT is a sales tax you charge customers and remit to HMRC quarterly. Income Tax is a tax on profit you owe personally at year-end (via Self Assessment). As a sole trader, you pay both - VAT quarterly and Income Tax on profit in January. As a company, you'd pay VAT quarterly and Corporation Tax on profit at year-end.
The system HMRC uses to collect Income Tax from individuals who aren't taxed at source, including sole traders, freelancers, landlords, and company directors. Returns are filed annually or via Making Tax Digital.
A tax on the profits of UK limited companies. The current main rate is 25% for profits over £250,000, with a smaller rate of 19% for profits under £50,000. Unlike VAT and Self Assessment, Corporation Tax returns are not yet part of HMRC's Making Tax Digital system.
The total income your business earns from selling products or services, before any costs are deducted. It's the top line of your income statement and the starting point for calculating profit.