VAT for UK startups: when to register, which scheme, and fixing mistakes

When do I have to register?

You must register if either:

• Your total taxable turnover for the last 12 months goes over £90,000 (the  VAT  threshold)
• You expect your taxable turnover to go over £90,000 in the next 30 days

Once registered, you will have to charge VAT on all applicable goods and services you sell. There are three rates of VAT:

1. Standard rate (20%) on most goods and services
2. Reduced rate (5%) on some goods and services (e.g. home energy)
3. Zero rate (0%) on some goods and services (e.g. children’s clothing)

See HMRC’s list of VAT rates on different goods and services here.

Can I register voluntarily?

Yes. You can register for VAT at any time. This lets you reclaim VAT on goods you still have, incurred up to 4 years before registration. For services, the limit is 6 months before.

Here are the main pros and cons of doing so:

Pros:

1. VAT Recovery -  once registered you will be able to reclaim VAT incurred on eligible business expenses. This is particularly beneficial if you have incurred a lot of VAT expenses while setting up your business.
2. Possible savings for customers - If you don’t plan to increase your prices but intend to add VAT in theory, this is a saving for VAT-registered customers, but in practice, most people add VAT to their prices when becoming VAT-registered so the net effect for VAT-registered customers is £0. 

Cons:

1. Slightly more administration - Instead of simply categorising your expenses, you will have to additionally determine the VAT status of your expenses for your VAT returns. You will also need to file VAT returns (usually quarterly). We can support with this here if it helps. 
2. Higher prices for customers not VAT-registered - Once registered you will have to charge VAT on all applicable goods and services you sell. Customers who aren’t registered for VAT themselves will likely have to pay the VAT but won’t be able to re-claim it back. 

Recommendation

You will have to weigh the factors above, but we usually recommend selecting Quarterly filings if you register for VAT. Monthly is too frequent and increases your admin burden & accounting cost, whilst Annual sounds good, but often involves you making estimated interim payments, which offsets the perceived benefit of registering annually.

VAT exemption & partial-exemption

Some goods and services are exempt from VAT. If all goods and services sold in your business are exempt, then your business will be exempt and unable to register for VAT. This means you will not be able to reclaim VAT on any purchases and likewise won’t charge VAT on sales.

Common exempt goods and services include:

• Financial services: insurance, loans & some banking services
• Education: some training and educational services
• Health services: most medical treatment provided by registered doctors
• Charitable activities: certain supplies or fundraising events by charities
• Subscriptions: certain subscriptions to membership organisations
• Commercial property: selling, leasing and letting of commercial property, however this exemption can be waived

Note that exempt goods and services are different from zero-rated. Zero-rated goods and services still need to be included in your taxable turnover for VAT purposes, exempt goods don’t.

Partial Exemption

This applies to some businesses that supply both exempt and VAT-rated goods and services. For example, a business that supplies both insurance services (exempt) and consulting services (VAT-rated) would be partially exempt.

Partially exempt businesses can only reclaim a proportion of VAT incurred. Usually, this is based on the proportion of sales that are VAT-rated; for example, if 70% of your sales are VAT-rated, you can reclaim 70% of VAT incurred on expenses.

De Minimis Rule for Small Businesses

You can reclaim all input VAT if VAT relating to exempt supplies is less than £625 per month and represents no more than 50% of total VAT on purchases.

It’s also worth noting that you may need to submit an annual adjustment to ensure the VAT reclaimed throughout the year accurately reflects the mix of VAT-rated and VAT-exempt sales in the year.

If you would like to register for VAT, see our guide here.

I filed a VAT return incorrectly. What happens now?

Most VAT errors are fixed on the next return, without contacting HMRC and without a penalty. Errors can be corrected going back 4 years.

Adjust on your next return if the net error is £10,000 or less, or between £10,000 and £50,000 and less than 1% of total sales (box 6). Add it to box 1 if you owe HMRC, box 4 if HMRC owes you.

Report separately if the error is over £50,000, or over £10,000 and more than 1% of total sales.

An honest mistake found and corrected is ordinary VAT administration, not an investigation. Founders often delay filing because they know something is wrong, which turns a correctable error into a late return as well.

Do I charge VAT to customers abroad?

It depends on whether the customer is a business or a consumer.

Services to a business outside the UK - place of supply is where your customer belongs, so it is outside the scope of UK VAT. You do not charge UK VAT; they account for it under the reverse charge.

Services to a consumer outside the UK - place of supply is where you belong, so you charge UK VAT as normal.

Buying services from outside the UK - the reverse charge applies to you. You show the VAT as output tax and reclaim it as input tax on the same return.

These are the general rules. Digital services, land, events and transport each have their own place-of-supply rules that override them.