How Does VAT Work for a Limited Company?

Register if taxable turnover in the last 12 months exceeds £90,000, or if you expect turnover in the next 30 days alone to exceed it. The look-back test is checked at the end of each month. Deregistration is possible if turnover is expected to fall below £88,000.

Companies not established in the UK must generally register from the first taxable UK supply, with no threshold.

Voluntary registration can suit companies selling mainly to VAT-registered businesses or making zero-rated sales, because VAT on costs can then be reclaimed.

The standard rate is 20%; some goods and services are at 5% or zero-rated; others are exempt or outside the scope of VAT. Exempt supplies do not count as taxable turnover and can restrict VAT recovery. Services to overseas businesses are often outside the scope of UK VAT under the business-to-business place-of-supply rule.

A registered company can usually reclaim VAT on business costs with a valid VAT invoice. Exceptions include business entertainment and most cars available for private use. On registration, VAT on goods still held and bought in the previous four years, and services in the previous six months, may be reclaimable subject to conditions.

Cash accounting, available up to £1.35 million taxable turnover, accounts for VAT when cash is received and paid. Annual accounting allows one return with interim payments. The Flat Rate Scheme pays a fixed percentage of gross turnover, but limited cost traders pay 16.5%, which often removes the benefit for service companies.

VAT returns are filed through Making Tax Digital-compatible software, usually quarterly. The return and payment are normally due one calendar month and seven days after the period ends. Late submission builds penalty points; a £200 penalty applies once the threshold is reached, which is four points for quarterly filers. Late payment penalties apply where VAT remains unpaid after 15 days, with interest charged from the due date.