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Understanding VAT for Limited Companies in the UK
When it comes to Value Added Tax (VAT), many UK business owners wonder whether their limited company is required to register, charge, and pay VAT. The short answer is yes—but only if your business meets certain criteria.
In this guide, we will break down VAT obligations for UK limited companies in a simple, easy-to-understand way. Whether you’re a new entrepreneur or an established business owner, this article will help you understand:
When a limited company must register for VAT
The different VAT rates and what they apply to
VAT-exempt businesses
How VAT works in real-life business transactions
Let’s start by understanding who needs to register for VAT in the UK.
When Does a Limited Company Need to Register for VAT?
A limited company in the UK must register for VAT if:
Its taxable turnover exceeds £90,000 in a 12-month period.
It expects to exceed the £90,000 threshold within the next 30 days.
It is a non-UK business supplying goods or services in the UK.
Understanding Taxable Turnover
VAT is only charged on certain taxable supplies. These include:
✅ Standard-rated goods/services (most products and services at 20% VAT)
✅ Reduced-rated goods/services (such as home energy, charged at 5% VAT)
✅ Zero-rated goods/services (e.g., certain food, children’s clothes, books – taxed at 0% VAT but still counted in turnover)
💡 Example: Sarah runs a marketing agency (a standard-rated service). In the last 12 months, she invoiced clients for a total of £92,000. Since this exceeds the VAT threshold, she must register for VAT within 30 days.
Voluntary VAT Registration
Even if a limited company does not reach the VAT threshold, it can still voluntarily register for VAT. This might sound strange—why would a business choose to register if they don’t have to?
Here’s why:
✅ It allows a company to reclaim VAT on expenses (useful if a business has high costs)
✅ It improves business credibility (some clients prefer VAT-registered suppliers)
✅ It helps businesses prepare for future growth
💡 Example: James owns a small IT consultancy earning £60,000 per year. He voluntarily registers for VAT, allowing him to claim back VAT on his office rent, software, and equipment. This reduces his business costs.
VAT Rates in the UK (Updated for 2024-2025)
VAT in the UK is charged at different rates depending on the goods or services provided.
VAT Rate | Percentage | Examples of Goods/Services |
Standard Rate | 20% | Most products and services, including electronics, clothing, and consultancy services. |
Reduced Rate | 5% | Domestic energy, child car seats, mobility aids for over 60s. |
Zero Rate | 0% | Children's clothes, books, newspapers, most food items. |
Some businesses may deal with VAT-exempt supplies, which means VAT is not charged at all (unlike zero-rated goods, which are still counted for VAT purposes).
Examples of VAT-exempt services:
❌ Health services provided by doctors and dentists
❌ Financial services (insurance, loans, and credit)
❌ Education and training courses
💡 Example:
A private dentist practice in London earns £150,000 per year, but all its services are VAT-exempt. Since it only provides exempt services, it does not need to register for VAT.
How Limited Companies Charge and Pay VAT
Once registered, a limited company must:
1️⃣ Charge VAT on invoices to customers (e.g., if a service costs £500, it will be £600 after adding 20% VAT).
2️⃣ Record VAT transactions properly and file VAT returns (usually every 3 months).
3️⃣ Pay VAT to HMRC after deducting any VAT they’ve paid on business expenses (this is called VAT reclaim).
💡 Example of VAT Invoice Calculation:
A web design company completes a project worth £2,000. The invoice will be:
Net cost: £2,000
+ 20% VAT: £400
Total invoice: £2,400
The customer pays £2,400, but the company only keeps £2,000—the remaining £400 is VAT, which must be paid to HMRC.
Key Takeaways
A limited company must register for VAT if its taxable turnover exceeds £90,000.
Businesses can voluntarily register for VAT, even if they don’t meet the threshold.
VAT rates vary (20% standard, 5% reduced, 0% zero-rated, and some exemptions).
VAT-registered businesses charge, collect, and pay VAT to HMRC.
VAT Registration, Returns, and Compliance for Limited Companies
Understanding VAT registration and compliance is crucial for any limited company in the UK. Once a business reaches the VAT threshold, it must follow strict rules set by HMRC regarding VAT registration, invoicing, and filing returns. Failing to comply can lead to penalties and unnecessary financial burdens.
This section will explain:
The VAT registration process
How to submit VAT returns and make payments
What happens if VAT is paid late or a return is missed
VAT schemes that can help businesses manage their VAT obligations efficiently
VAT Registration Process for Limited Companies
Registering for VAT is a straightforward but important step for businesses. The process involves the following steps:
Determining whether the business needs to register for VAT
Collecting the required information for registration
Completing the online registration with HMRC
Receiving a VAT registration number and setting up VAT accounting
Step 1: Determining if VAT Registration is Necessary
A limited company must register for VAT if its taxable turnover exceeds £90,000 in a rolling 12-month period. Businesses can also voluntarily register if their turnover is below the threshold.
Certain businesses are exempt from VAT registration, including those that only sell VAT-exempt goods and services. If a business expects to exceed the threshold temporarily, it can apply for an exception from registration by providing evidence that turnover will drop below the deregistration threshold of £88,000 within the next 12 months.
Step 2: Required Information for VAT Registration
To register for VAT, a limited company must provide:
Company registration details
Business trading name and contact information
The business bank account details
Details of turnover, nature of business activities, and estimated taxable sales
Information about any associated or linked businesses
Step 3: Registering for VAT with HMRC
Most businesses register for VAT online through the official HMRC website. In rare cases, businesses may need to register by post using VAT1 form, such as for partnerships or businesses joining special VAT schemes.
Step 4: Receiving a VAT Registration Number
Once HMRC processes the application, the business receives a VAT registration number, which must be included on all VAT invoices. The business will also be set up for Making Tax Digital (MTD), which requires keeping digital VAT records and filing VAT returns using compatible software.
How to Submit VAT Returns and Payments
Once a limited company is VAT-registered, it must submit VAT returns and make payments at the end of each VAT period. VAT returns are typically due every three months and must be filed through Making Tax Digital for VAT.
A VAT return includes:
The total VAT collected from sales (output VAT)
The VAT paid on business purchases (input VAT)
The amount of VAT owed to HMRC or reclaimable from HMRC
If the VAT paid on purchases is higher than the VAT collected from sales, the business can claim a VAT refund.
Example of VAT Return Calculation
A VAT-registered consultancy firm submits a quarterly VAT return:
Sales revenue: £50,000
VAT charged to clients at 20 percent: £10,000
VAT paid on expenses: £3,000
VAT owed to HMRC: £10,000 - £3,000 = £7,000
The company must pay £7,000 to HMRC for that VAT quarter.
Late VAT Payments and Penalties
Failing to submit VAT returns or making late payments can result in financial penalties. HMRC introduced a new VAT penalty system in January 2023, which applies to late VAT submissions and payments.
Delay | Penalty Charge |
Up to 15 days late | No penalty, but interest may apply |
16-30 days late | 2 percent of the outstanding VAT |
More than 30 days late | 4 percent of the outstanding VAT plus additional penalties |
Additionally, late submission penalties are based on a points system. If a business repeatedly misses VAT return deadlines, penalties increase.
VAT Schemes for Small Businesses
To help businesses manage VAT efficiently, HMRC offers several VAT schemes:
Flat Rate Scheme
Instead of calculating VAT on each transaction, businesses pay a fixed percentage of their gross turnover to HMRC. This scheme is useful for businesses with low VAT expenses.
Example: A consultancy firm with a 12 percent flat rate pays 12 percent of its VAT-inclusive sales instead of calculating input and output VAT separately.
Cash Accounting Scheme
Businesses pay VAT only when they receive payments from customers rather than when invoices are issued. This improves cash flow, particularly for businesses that experience late payments from clients.
Annual Accounting Scheme
Instead of submitting VAT returns quarterly, businesses can opt to file one VAT return per year and make advance VAT payments throughout the year.
Key Takeaways
A limited company must register for VAT if turnover exceeds £90,000 in a 12-month period.
VAT returns must be submitted every quarter through Making Tax Digital.
Late VAT payments can result in penalties and interest charges.
VAT schemes like the Flat Rate Scheme and Cash Accounting Scheme can simplify VAT management.
VAT Recovery, Reclaiming VAT on Expenses, and International VAT Rules
For VAT-registered limited companies in the UK, reclaiming VAT on eligible business expenses can significantly reduce costs. Additionally, businesses involved in international trade must understand how VAT applies to imports and exports.
In this section, we will cover:
How limited companies can reclaim VAT on business expenses
VAT rules for international trade, including EU and non-EU transactions
VAT deregistration and when a business can stop paying VAT
How to Reclaim VAT on Business Expenses
VAT-registered businesses can reclaim the VAT paid on goods and services purchased for business use. However, strict rules apply regarding what VAT can be claimed and how to claim it.
Eligible Business Expenses for VAT Reclaim
A business can reclaim VAT on:
Office supplies, computers, and equipment
Business rent, utility bills, and phone costs
Professional services (legal, accounting, and consulting fees)
Business travel, including fuel, hotel stays, and transport
Stock and materials used for business operations
Non-Recoverable VAT Expenses
Some expenses are not eligible for VAT reclaims, including:
Entertainment costs, such as client meals and hospitality
Personal expenses or items used for non-business purposes
VAT on purchases where the company is not VAT-registered
Example of a VAT Reclaim
A design agency purchases new computers for the office. The total cost is £6,000 plus 20 percent VAT, making the total £7,200. The company can reclaim £1,200 on its next VAT return, reducing the overall business cost.
To reclaim VAT, businesses must keep accurate VAT invoices and receipts, which must include the supplier’s VAT number, date, and VAT amount.
VAT and International Trade
Limited companies involved in importing or exporting goods must understand the VAT implications of cross-border transactions.
VAT on Imports from Outside the UK
If a UK business imports goods from non-UK countries, VAT is usually charged at the standard rate of 20 percent and must be paid at customs.
To avoid cash flow issues, businesses can use Postponed VAT Accounting (PVA), which allows them to:
Defer VAT payments at the border
Record the VAT on their next VAT return instead of paying immediately
VAT on Exports from the UK
For exports to businesses outside the UK, VAT is generally not charged. Instead, businesses must keep proof of export, such as shipping documentation, to support zero-rated VAT treatment.
VAT Rules for Trading with the EU
Since Brexit, VAT rules have changed for UK companies selling goods and services to the EU. Key points include:
Goods exported to EU countries are zero-rated for UK VAT
UK businesses selling to EU customers may need to register for VAT in the destination country
The One Stop Shop (OSS) scheme can help businesses selling digital services in the EU to comply with VAT rules efficiently
VAT Deregistration: When Can a Business Stop Paying VAT?
A business can apply to deregister for VAT if:
Its taxable turnover falls below £88,000 (the deregistration threshold)
It ceases trading or stops making VAT-taxable sales
It switches to selling only VAT-exempt goods or services
VAT Deregistration Process
Businesses must apply for deregistration through HMRC’s VAT online service. Once approved, they will receive a deregistration date, after which they must stop charging VAT.
However, businesses may need to account for VAT on stock and assets held at the time of deregistration if their value exceeds £5,000.
Key Takeaways
VAT can be reclaimed on business-related expenses, but certain costs, such as client entertainment, are excluded.
Businesses trading internationally must understand import VAT, Postponed VAT Accounting, and EU VAT registration requirements.
VAT deregistration is possible when turnover falls below £88,000, but businesses must comply with final VAT reporting requirements.
For official VAT guidance, businesses can refer to the UK government’s VAT section: GOV.UK VAT Guidance.
Summary of the Key Points of the Article
A limited company must register for VAT if its taxable turnover exceeds £90,000 in a 12-month period, but voluntary registration is also an option.
VAT rates in the UK include 20 percent (standard), 5 percent (reduced), and 0 percent (zero-rated), while some goods and services are VAT-exempt.
Once registered, a business must charge VAT on sales, submit VAT returns quarterly via Making Tax Digital (MTD), and pay VAT to HMRC.
Late VAT payments result in penalties and interest charges, with a new points-based system for repeated late submissions.
VAT can be reclaimed on business expenses, but certain costs, such as client entertainment, are not eligible for VAT recovery.
Businesses trading internationally must follow VAT rules for imports, exports, Postponed VAT Accounting, and EU VAT registration.
VAT deregistration is allowed when turnover falls below £88,000, but businesses must still complete final VAT reporting and pay any outstanding VAT.
FAQs
Q1: Can a limited company be VAT-registered if it makes only exempt supplies?
A: No, a limited company that exclusively sells VAT-exempt goods or services cannot register for VAT, as it does not charge VAT on its sales or reclaim VAT on purchases.
Q2: Does a newly formed limited company need to register for VAT immediately?
A: No, a new limited company only needs to register for VAT if its taxable turnover is expected to exceed £90,000 within the next 30 days or once it surpasses the threshold within a rolling 12-month period.
Q3: Can you voluntarily deregister for VAT even if turnover is above the threshold?
A: No, voluntary VAT deregistration is only allowed if taxable turnover falls below the deregistration threshold of £88,000 or if the company ceases trading.
Q4: Does a limited company still need to pay VAT if its customers are VAT-exempt businesses?
A: Yes, the limited company must charge VAT on taxable supplies even if its customers are VAT-exempt, but those customers will not be able to reclaim the VAT charged.
Q5: Can you change your VAT scheme after registration?
A: Yes, businesses can switch between VAT schemes, such as moving from the standard VAT scheme to the flat rate or cash accounting scheme, provided they meet eligibility criteria.
Q6: Do limited companies with no sales still need to file VAT returns?
A: Yes, VAT-registered companies must submit VAT returns even if they have no sales in a particular period, in which case they file a "nil return."
Q7: Can you reclaim VAT on business purchases made before VAT registration?
A: Yes, VAT can be reclaimed on goods bought up to four years before registration and services up to six months before registration, as long as they were for business use.
Q8: What happens to VAT if a limited company ceases trading?
A: The company must deregister for VAT, submit a final VAT return, and account for VAT on remaining business assets if their total VAT-inclusive value exceeds £5,000.
Q9: Do charities that are limited companies need to pay VAT?
A: Charities must register for VAT if their taxable turnover exceeds the threshold, but some charitable activities may qualify for VAT reliefs or exemptions.
Q10: Can a limited company reclaim VAT on business entertainment expenses?
A: No, VAT cannot be reclaimed on business entertainment expenses unless they are for employees rather than clients, suppliers, or business partners.
Q11: How does VAT apply to digital services sold by a UK limited company to EU customers?
A: If selling digital services to EU consumers, the company must comply with VAT rules under the One Stop Shop (OSS) scheme and charge VAT based on the customer’s location.
Q12: Can a UK limited company avoid VAT on imports?
A: No, but businesses can use Postponed VAT Accounting (PVA) to defer import VAT and reclaim it on their VAT return instead of paying it upfront at customs.
Q13: What VAT records must a limited company keep?
A: VAT-registered companies must maintain digital VAT records, including sales invoices, purchase receipts, VAT return submissions, and import/export documentation.
Q14: Can a limited company issue VAT invoices in a foreign currency?
A: Yes, but VAT must be shown in GBP, and the exchange rate used must be one of HMRC’s approved rates at the time of the transaction.
Q15: Is VAT charged on deposits received by a limited company?
A: Yes, VAT is chargeable on deposits if they form part of the total payment for goods or services, unless the deposit is fully refundable.
Q16: Can a company be fined for not registering for VAT on time?
A: Yes, failing to register for VAT on time can result in penalties based on how much VAT is owed and how late the registration is.
Q17: Does VAT apply to second-hand goods sold by a limited company?
A: Yes, VAT is chargeable on second-hand goods unless the company uses the VAT Margin Scheme, which taxes only the profit margin instead of the full sale price.
Q18: How does VAT apply to limited companies operating in construction?
A: Many construction services are subject to reverse charge VAT, meaning the customer accounts for VAT instead of the supplier, reducing VAT fraud risks in the sector.
Q19: Can a limited company reclaim VAT on fuel used for both business and personal use?
A: Yes, but if the vehicle is also used for personal purposes, the company must apply a fuel scale charge to account for the non-business portion.
Q20: Do limited companies need to pay VAT on business rates?
A: No, business rates are exempt from VAT, so companies do not need to charge or pay VAT on them.
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