Explaining VAT for Startups: A Beginner’s Guide

As a growing entrepreneur stepping into the world of business, there are various aspects you need to familiarize yourself with. One important area is Value Added Tax (VAT). We’re here to elaborate on it for you in this beginner’s guide.

Understanding VAT: The Basics

Value Added Tax, commonly known as VAT, is a consumption tax levied on the value added to goods and services at each stage of production or distribution. In simpler terms, it’s a tax on the final consumption of products or services. The responsibility of collecting and remitting VAT falls on businesses and understanding the basics can help you navigate this aspect of running a startup.

When to Register for VAT

In the UK, a business must register for VAT with HM Revenue & Customs (HMRC) if its taxable turnover exceeds the VAT threshold (which can change annually).  Since September 2021, this threshold is £85,000. Even if your turnover is below this threshold, you can voluntarily register for VAT.

The VAT Rates

VAT comes in different rates depending on the type of goods or services you provide. There are currently three main VAT rates in the UK:

Standard Rate (20%): This is the most common VAT rate and applies to most goods and services.

Reduced Rate (5%): Some goods and services, like children’s car seats and domestic fuel, are eligible for the reduced rate.

Zero Rate (0%): This rate applies to certain goods and services like most food items, books, and public transport.

VAT Flat Rate Scheme

The VAT Flat Rate Scheme could be an option for startups looking to simplify their VAT accounting. This scheme is designed to make calculating your VAT payments easier by applying a fixed rate to your gross turnover. On the other hand, depending on the sector your startup operates in, VAT Flat Rate might not accurately reflect the amount of VAT you would have paid under the standard VAT accounting method.  It’s recommended to consult with a professional to determine if this scheme is right for your startup. 

If you have a startup and you are unsure about your VAT options, specialists from J. Dauman & co are more than happy to answer any questions!