VAT for Startups: Everything You Need to Know 

Are you a startup based in the UK whose taxable turnover exceeds £90,000 in any rolling 12 months? If yes, then you may need to register for Value Added Tax (VAT). So, understanding VAT for startups can help manage their cash flow, pricing and compliance obligations as they grow.

However, not every UK startup needs to register for VAT. The VAT registration threshold is currently £90,000 of taxable turnover. If your taxable turnover is below this threshold, you can also choose to register voluntarily.

This blog explains VAT in the UK, including VAT registration for startups, Making Tax Digital for VAT, and some VAT schemes that may be relevant to growing businesses.

What Is VAT for Startups?

VAT is a tax charged on most goods and services supplied by VAT-registered businesses in the UK, although the rate and VAT treatment depend on the type of supply. So, if your startup is VAT-registered, you typically charge VAT on taxable supplies and account for it to HM Revenue and Customs (HMRC).

Additionally, you may be able to reclaim VAT on eligible business purchases, subject to the relevant rules.

How Much Is VAT Tax for Startups?

The standard VAT rate in the UK is 20% and applies to most standard-rated goods and services. However, startups do not automatically have to register for or charge VAT from day one.

Generally, they need to register if their taxable turnover exceeds the £90,000 VAT registration threshold. However, you can choose to register voluntarily below this threshold.

Currently, the standard VAT rates UK are:

• Standard rate: 20% on most goods and services
• Reduced rate: 5% on some goods and services
• Zero rate: 0% on certain zero-rated goods and services, like most food.
• Some supplies are exempt from VAT

Moreover, the VAT for startups depends on what the business sells. Therefore, startups should not assume that every sale is automatically subject to the 20% standard rate.

When Should a Startup Register for VAT?

As mentioned above, the current threshold for VAT registration for startups is £90,000 of taxable turnover. This means you need to register if your taxable turnover exceeds £90,000 in the previous 12 months or you expect it to exceed £90,000 in the next 30 days.

Even if your taxable turnover is below the VAT registration threshold, you can choose to register voluntarily. Registering early for VAT for startups can be useful if you have significant VAT-bearing business expenses because you may be able to reclaim eligible VAT.

Is Early Voluntary Registration Helpful for Startups in the UK?

Yes, voluntarily registering early for VAT can help some startups in the UK.  However, it is not automatically beneficial.

Potential advantages include:

• You can reclaim eligible VAT on certain business purchases.
• Some business customers may prefer to work with VAT-registered suppliers, particularly where they can recover VAT.
• You are prepared for VAT obligations before reaching the compulsory registration threshold.

Note that it also means charging VAT, keeping VAT records, and submitting VAT returns. So, consider the additional administration as well.

What Is Making Tax Digital for VAT?

MTD for VAT is an important consideration when discussing VAT for startups that become VAT registered. Under the VAT rules for startups, VAT-registered businesses need to keep required VAT records digitally and submit VAT Returns using compatible software, unless an exemption applies.

So, you should consider using compatible accounting software when you register for VAT. The software can help prepare VAT Returns, maintain digital VAT records, and submit them to HMRC. If you use more than one software product to maintain your VAT records, the relevant systems generally need to be connected using digital links rather than relying on manual transfers of data.

Visit the official HMRC website to find an HMRC-compatible software to manage your VAT records and reporting requirements more efficiently.

What Are the Common VAT Mistakes Startups Make?

Now that we understand VAT for startups and the registration threshold, let’s discuss the mistakes startups can make while managing VAT. Some of the common mistakes include:

• Failing to register on time
• Incorrectly calculating taxable turnover
• Submitting late or inaccurate VAT returns
• Reclaiming non-allowable VAT
• Invalid or missing invoices
• Failing to keep proper VAT records

These errors can result in penalties, interest, and additional administrative work.

Furthermore, startups may overlook the opportunity to reclaim VAT on eligible expenses or claim non-allowable VAT. Always claim eligible expenses, and avoid claiming VAT on blocked expenses like business entertainment, client lunches, or personal fuel.

Can Startups Reclaim VAT on Business Expenses?

Yes, a VAT-registered startup can reclaim VAT on eligible business purchases. However, you should understand that not every business expense automatically qualifies for a VAT reclaim. The purchase must meet the relevant VAT recovery rules. Also, the business should have appropriate evidence, such as a valid VAT invoice, to support the claim.

Therefore, accurate bookkeeping is a vital part of VAT for startups. You should keep the required VAT records and invoices and make sure expenses are treated correctly before you claim input VAT. Yes, VAT-registered businesses generally need to keep VAT records for at least six years, subject to specific exceptions such as the VAT One Stop Shop scheme.

Which VAT Schemes May Be Suitable for Startups?

Keep in mind that not every business has to use the standard VAT accounting method. HMRC offers alternative VAT schemes. These schemes may help eligible startups manage cash flow and simplify VAT administration.

Flat Rate Scheme

This scheme allows eligible businesses to calculate the VAT they pay to HMRC using a fixed percentage of their VAT-inclusive turnover. Eligibility generally requires expected VAT taxable turnover of £150,000 or less, excluding VAT.

Annual Accounting Scheme

Generally, this scheme requires you to submit one VAT return each year, with payments made during the year.

Cash Accounting Scheme

This scheme allows you to account for VAT when you receive payment from customers and pay your suppliers, which can help with cash flow.

However, these schemes are not suitable for every UK startup. Before choosing a VAT scheme, businesses should consider their circumstances and the relevant HMRC rules.

To Sum Up

Understanding VAT for startups is essential when a new business starts to grow. The current UK VAT registration threshold is £90,000 of taxable turnover. However, businesses in the UK can also register voluntarily below this level in appropriate circumstances.

Once your business is VAT registered, you need to charge VAT correctly, maintain appropriate records, and submit VAT returns. Keep track of taxable turnover from the start. It can help you identify when VAT registration may become necessary and avoid unexpected compliance problems.

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Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.