What is VAT and how to register

All business owners need to be aware of VAT and what it means for their business. Some businesses are required to register for VAT whereas others can choose to do so. Here we’ll run through what you need to know about VAT, including how and when to register and why it might benefit your business.

What is VAT?

VAT stands for value added tax and it’s a sales tax collected on behalf of HMRC. The VAT part of any income never belongs to the business so it’s helpful to set it aside immediately in a separate account - with Starling, you can create a Saving Space for this. You are allowed to reduce the amount owed to HMRC by any VAT that you have suffered on your own purchases and expenses, provided that you have a valid VAT invoice as proof.

At the moment, the standard rate of VAT is 20% for most goods and services. For some goods and services there is a reduced rate of 5%, for example on mobility aids for the elderly. A few things are exempt, at 0%, for example advertising services for charities.

When to register for VAT

It’s not compulsory to register for VAT until your VATable turnover exceeds, or is expected to exceed, £90,000* in any 12 month period. At the end of every month it’s worth checking whether you have invoiced more than this amount in the last 12 months.

If your turnover is below £90,000 you may wish to voluntarily register for VAT as there are certain benefits, explained in the Starling guide The benefits of voluntary VAT registration. One advantage is that you could be able to reclaim the VAT you pay on most of the goods and services you purchase from other businesses.

How to register for VAT

Once your income reaches the £90,000 limit on your VATable turnover, then you need to register and can do so online. Some goods and services are exempt from VAT such as education and health.

When you approach this limit, it might be the point at which you decide to involve a bookkeeper or accountant in looking after your business rather than learning all the VAT rules yourself. You will usually have to submit VAT returns each quarter.

If you are VAT registered and above the £90,000 threshold, you are required to follow the Government’s Making Tax Digital (MTD) process, and use MTD compliant software to submit your VAT returns. For many of our Starling businesses customers, this can be done easily through the Business Toolkit, which complies with recent MTD changes.

From 1 April 2022, anyone registered for VAT, including those who registered voluntarily, will need to comply with MTD.

The MTD Timeline

Pros and cons of VAT registration

Some businesses prefer to wait until they are obliged to register for VAT, especially if they sell to customers or individuals who are not VAT registered (in which case your business would immediately appear 20% more expensive). However, there are also some good reasons why you might choose to register voluntarily before you reach the VAT threshold, such as reclaiming the VAT on items you purchase. Learn more about all the benefits of being VAT registered.

*current limit 2024/25

This article is intended as general information only and does not constitute advice in any way. For any specific questions, you may want to consult a qualified accountant.