VAT — a practical summary

VAT is a tax you collect for HMRC on your sales, offset by the VAT you’ve paid on purchases. Simple in principle; the detail is where businesses get caught.

When you must register

Registration is compulsory once taxable turnover in any rolling 12 months passes £90,000 — or as soon as you expect to pass it within the next 30 days. The rolling test is the trap: it’s not your accounting year, it’s any 12-month window, checked continuously. You can deregister if turnover falls below £88,000.

Voluntary registration below the threshold can make sense if your customers are VAT-registered businesses (they reclaim what you charge) or you have significant input VAT to recover. It rarely suits businesses selling to the public.

The rates

Most sales are standard-rated at 20%. Some are reduced-rated at 5%, zero-rated (still VATable, at 0% — think most food and children’s clothing), or exempt altogether. The differences matter: zero-rated sales still let you reclaim input VAT; exempt ones generally don’t. Health care — including most dental services — is largely exempt, which creates its own quirks for practices.

Schemes worth knowing

• Standard accounting — VAT on invoices issued and received, quarterly returns.
• Cash accounting — VAT follows money movement, not invoices. Kind to cash flow when customers pay slowly.
• Flat rate scheme — a fixed percentage of turnover for smaller businesses; less reclaiming, less arithmetic. Sometimes cheaper, sometimes not — it needs checking against your numbers.
• Annual accounting — one return a year with instalments through it.

Making Tax Digital

VAT returns must be kept and filed digitally through compatible software. Xero handles this natively — returns are prepared from the live books and filed to HMRC directly, which is exactly how we run every VAT-registered client. Returns and payments are due 1 month and 7 days after each quarter ends.

How we help

We watch the threshold so you register at the right moment, pick the scheme that suits your numbers, file every return from clean Xero data — and deal with HMRC if they ever come asking.