VAT compliance as a business owner – What should you know?

As a business owner, it is important to comply with Value Added Tax (VAT) regulations to avoid penalties and legal issues.

VAT compliance can be complicated and time-consuming, but it is essential to ensure that your business is operating within the law.

Here is a VAT compliance checklist to help you stay on top of your VAT obligations:

VAT registration and rates

Register for VAT if your taxable turnover exceeds the VAT registration threshold of £85,000 in a 12-month period.

In order to comply with the 'rolling' 12-month VAT period, you must complete a full year of business.

Once you've completed your first year, you'll need to add your latest month's turnover to the total figure at the end of each subsequent month to determine whether you've exceeded the current threshold.

However, you can also voluntarily register for VAT if your taxable turnover is below the threshold.

Make sure you know the correct VAT rates for your products and services.

There are different VAT rates for different goods and services, and it is important to apply the correct rate to avoid underpaying or overpaying VAT.

VAT invoices

Issue VAT invoices for all sales made to VAT-registered customers. The invoice should include your business name, address, VAT registration number, invoice number, and VAT amount.

VAT recording and reporting

You must submit a report of your VAT on time to avoid late filing penalties and retain a record of this.

VAT returns should be filed and paid online every three months under the Government’s Making Tax Digital system using HMRC compliant software or APIs.

You should keep accurate and up-to-date VAT records for at least six years. This includes VAT invoices, receipts, and credit notes.

VAT payments

Ensure that you pay the correct amount of VAT on time. Late payments can result in penalties and interest charges.

VAT schemes

Consider joining the VAT flat rate scheme if your business turnover is less than £150,000 per year. This scheme simplifies VAT accounting and can save you time and money.

If you sell second-hand goods, consider using the VAT margin scheme. This scheme calculates VAT on the difference between the purchase price and the selling price, rather than the full selling price.

VAT exemptions and zero-rated sales

Understand the rules for VAT exemptions and zero-rated sales. Certain goods and services, such as food, books, and children’s clothes, are zero-rated or exempt from VAT.

VAT penalties

Be aware of VAT penalties for non-compliance. A new points-based late filing and payment penalty system for VAT has been introduced for VAT periods starting on or after 1 January 2023.

Every time a submission deadline is missed you will receive a point, which HMRC will notify you of on each occasion. After receiving a certain number of points an initial financial penalty of £200 is charged.

Businesses that ensure they keep up to date and compliant with their VAT returns face less likelihood of being fined under this new penalty system and fines for occasional defaults will be less swinging than under the previous default surcharge regime.

However, the new regime will apply fines to late filed nil returns and repayment returns, which was not the case under the previous default surcharge regime and so repayment businesses need to be aware. 

By following this VAT compliance checklist, you can ensure that your business is operating within the law and avoid penalties and legal issues.

Remember, VAT compliance is an ongoing process, and it is important to stay up-to-date with changes in VAT regulations.

For advice on VAT and the areas covered, get in touch.