VAT

Also called Value Added Tax

A tax on most sales, collected by businesses on HMRC's behalf. The money in your account is not yours.

What it means

VAT is charged on most goods and services sold in the UK. Once registered, you add VAT to your prices (output tax), reclaim the VAT on most of what you buy (input tax), and pay HMRC the difference — usually quarterly.

You are, in effect, an unpaid collector. The VAT element of a payment from a customer belongs to HMRC from the moment it lands.

Why it matters

It changes your pricing, your cash flow and your admin all at once. If you sell to consumers, registering effectively raises your prices by the VAT rate or cuts your margin by it — the customer cannot reclaim it. If you sell to VAT-registered businesses, they can, so it is close to neutral.

It is also the most common cause of a sudden, ruinous tax bill in a small business, because the money was spent as if it were turnover.

What it looks like in practice

You must register once your VAT-taxable turnover over the previous rolling twelve months passes the registration threshold, or if you expect to pass it in the next thirty days alone. The threshold is set annually — check the current figure on GOV.UK rather than relying on what it was last year.

There are three main rates: standard, reduced and zero. "Zero-rated" and "exempt" are not the same thing — you can reclaim input VAT on zero-rated sales and generally cannot on exempt ones.

Open a separate account and move the VAT into it as it comes in. This one habit prevents most VAT disasters.

What to watch out for

The rolling twelve months. It is not your financial year, and businesses cross the threshold without noticing because they only look at the annual accounts.

Registering late. HMRC will backdate the registration and expect the VAT on sales you never charged it on, which comes straight out of your margin.

Assuming everything you buy is reclaimable. Entertainment, most cars, and anything with a private-use element are not, or not fully.

Where to get proper advice

GOV.UK is the authority on rates, thresholds and registration. An accountant is worth paying for the registration decision itself — particularly whether a scheme like the Flat Rate or Cash Accounting Scheme suits you.