VAT Guide for Small Businesses

VAT Guide for Small Business

Whenever a buyer or consumer buys a product or service, they have to pay Value Added Tax (VAT). Hence, this tax affects everyone, from small business owners to buyers. VAT has been applicable in the UK since 1973, and since then, it has been part of the product price. If you are running a small business in UK then it is your responsibility to keep an account of it as decided by guidelines set by the government. We will elaborate effort on this tax through our VAT guide for small business.

Firstly, you will have register once you have crossed the taxable turnover limit. After that, you will have to include the VAT into the prices of the products or services before it is sold. Thereafter, you are required to remit the VAT to HMRC of course after deducting the VAT paid to your suppliers.

You must be aware that UK-based businesses must submit their VAT returns to HMRC every three months. Depending on your business size, you will have to recruit an accountant or a team of accountants to do that, but that would be expensive. Instead, why not try partnering with CoxHinkins, which can offer you VAT services through our accountants?

You would agree with us that without VAT business life is incomplete, therefore it is important to understand each aspect of it thoroughly. Those aspects include penalties for late payments, VAT rates, different schemes, common mistakes, and so on. To make it easier to understand, we have prepared a VAT guide for small business. We hope this VAT guide for small business will help you to understand VAT better.

VAT Charges in the UK

The first thing we want to clear your mind in this VAT guide for small business is the VAT rates on different products. While most products and services come under the standard VAT rate of 20%, there are certain products, such as children’s car seats and home energy, on which a 5% rate is applicable. The basic necessities such as food and children’s clothes come under the zero percent category.

Who and When Should Register for VAT?

If you are based and operating in the UK then this VAT guide for small business is important for you because it will explain to you the importance to register for VAT if your business turnover is more than £90,000 in the last 12 months. Even if your annual turnover is less than that, registering for a VAT return will help you reclaim VAT for expenses related to VAT. Once you have crossed the 90,000 GBP in 12 months barrier then it required from you to inform HMRC with 30 days.

When Should the VAT Return be Submitted to the HMRC?

Another important part which will be covered in this VAT guide for small business is the submission of VAT returns to HMRC. The timing of your returns filing can be chosen by you after taking your business size into consideration. Mostly, businessperson’s prefer quarterly returns.

Penalties for Late Submission

Penalties on late submission of VAT will be determined through a points system. You will get a penalty point for each late payment until you reach the limit. Once you cross that limit, you will be fined £200. From then onwards, you will additionally be fined £200 for each subsequent late submission. The penalty point limit will be determined by the VAT return cycle, i.e., quarterly, monthly, and yearly.

VAT Accounting 
Penalty Points Limit 

Different VAT Schemes in the UK

Simplification of VAT reporting and payments can promote ease of doing business. For this reason, this VAT guide for small business focuses on various special VAT schemes have been made available to cater to different types of companies. Some of those special schemes are as follows:

Flat Rate Scheme

This scheme is ideal for small businesses like yours. Under it, you can pay HMRC a fixed percentage of your turnover.

Cash Accounting Scheme

Under this scheme, you are not required to account for VAT on the invoice date. Instead, you can consider it once you pay your supplier or receive payment from your customers.

Annual Accounting Scheme

Ideal for businesses with a turnover of £1.35 million or less, VAT returns can be filed per year. However, monthly and quarterly payments need to be made on the annual liability for the last return.

Margin Scheme for Second-Hand Goods

Businessperson’s who deal with antiques items come under this scheme. In this scheme, a businessperson will have to pay on the difference between purchase and sale price of the product.

Retail Scheme

Retailers find it difficult to deal with VAT because they deal with multiple products on which different VAT rates are applicable. This scheme makes it easy of them by calculating VAT on the percentage of retail sales.

Tour Operator Margin Scheme (TOMS)

This scheme is for travel agents and tour operators.

VAT Margin Scheme for Cars

This scheme is applicable on car dealers when they sell second-hand cars.

What Are the Common Mistakes Made in VAT Returns?

In this section of VAT guide for small business, we will focus on the mistakes that frequently occur while making VAT returns.

  • Not charging VAT on some non-standard supplies like recharging to third parties, supplies to staff, disposal of business assets, and intercompany management charges.
  • They are claiming VAT without a valid tax invoice.
  • I am not charging VAT on deposits received prior to issuance of the invoice.
    Receipt of deposit creates a tax point.
  • They are claiming 20% instead of 100% input VAT on the import VAT invoice sent by clearing and forwarding agents.
  • Not claiming VAT on capital items under the flat rate scheme
  • Not accounting for reverse charges on services bought from outside of the UK.
  • Not claiming VAT on discounts and bad debts

What Happens If You Make a Mistake on a VAT Return?

There is always a possibility of mistakes occurring in the VAT return, and HMRC accepts this reality. Therefore in this section of VAT guide for small business, we have focused on some rules and procedures to rectify errors in the VAT return.

If the value of the error is £10,000 or is between £10,000 and £50,000, and it does not exceed 1% of your total sales as per Box 6 of the next VAT return, then you are not required to inform the HMRC. Correct the next VAT return error using the VAT Notice 700/45. It is important to note that you only 4 years to rectify the errors.

Benefits of Hiring a Professional Accountant for VAT Returns

It is essential to understand that VAT-related tasks are complex and dynamic in nature, increasing the frequency of errors. Sometimes, these errors are costly. To avoid such errors, you will need the help of experienced VAT accountants, thus reducing your workload and saving you from penalties. That’s why we are mentioning these benefits through this VAT guide for small business, which are as follows:

Expertise in VAT Regulations

Accountants working on VAT are well-versed with the rules and regulations and VAT process. Hence the VAT guide for small business recommends accountants because they can give you expert advice on VAT returns.

Compliance and Accuracy

An accountant will easily identify and update you about overpayment or underpayment of taxes.

Reduction of Penalties through Timely Submissions

An accountant’s main duty is to ensure the submissions are made before the due date in order to avoid penalties.

Keeping You Prepared for VAT Investigations

Accountants can devise for you an efficient system of keeping records so that you can avoid penalties during VAT investigations.

Maintain Focus on Core Business

Running a business, even if it is small in size requires a lot of concentration and hard work. With a professional accountant by your side as recommended in this VAT guide for small business, you can concentrate fully on your business without any worry.

Identify VAT Saving

A VAT-specialist accountant is an expert who knows through which schemes you can get tax benefits.

Cash Flow Management

The VAT guide for small business also recommends accountants because they will track your cash flow in much more effective ways.

Fulfils MTD Requirements

Accountants have the required skills and knowledge to fulfil MTD requirements. To enjoy these benefits, the VAT guide for small  business recommends you to either recruit accountants directly in your business, which is impossible due to budgetary constraints, or you can approach accountants at CoxHinkins, who are experienced in offering VAT services at reasonable prices.

How to Choose the Right Accountant for Yourself According to Our VAT Guide for Small Business?

As mentioned above in this VAT guide for small business, there are multiple benefits of an accountant; However, if you select the wrong one, you may not be able to reap the full benefits. Therefore, we are mentioning certain things to consider during the selection in this VAT Guide for Small Business.

Qualifications and Experience

If your accounts is done by a uncertified accountant than your whole accounts will be under scrutiny and doubts. That’s why we are stressing in this VAT guide for small business to hire an accountant who is certified by professional accountant bodies such as the Institute of Chartered Accountants in England and Wales (ICAEW) and the Association of Chartered Certified Accountants (ACCA).


Many accountants specialise in certain aspects of accounting. For example, if you want someone to handle your VAT accounts, you must search for an experienced VAT specialist accountant.

Smooth Communication and Availability

If you have chosen an accountant through a service provider such as CoxHinkins, we can guarantee its availability whenever you need it. Also, you will be able to communicate openly and clearly with our accountant. It is important to note that with clear and open communication, both of you can stay aligned and avoid confusion.


Through this VAT Guide for Small Business, we have successfully simplified the nitty gritty of VAT in the UK and its impact on small businesses. We hope that you will immediately approach our professional and experienced VAT accountants and avail yourself of the full benefits.


Blog Categories

Recent Blogs

Get a Free Quote

Scroll to Top