Value Added Tax

A strong VAT control system should clearly identify who is responsible for VAT, document the processes involved and regularly check that controls are working. HMRC also recommends keeping procedures up to date when the business, its systems or the VAT rules change.

Businesses should also review how VAT data moves through their systems. This includes checking tax codes, customer and supplier information, VAT reporting and the use of manual adjustments. For larger businesses, HMRC recommends a VAT risk register to record risks, controls and how their effectiveness is tested.

It is also important to check that controls are working as intended. This could include reviewing a sample of transactions, checking VAT calculations and reconciliations, and investigating any unusual or unexpected results. Any errors or weaknesses identified should be recorded and followed up to reduce the risk of the same problem happening again.

The guidance also covers Making Tax Digital, including ensuring that VAT records are complete and accurate and that digital links between systems work correctly.

While the guidance is aimed particularly at larger and more complex businesses, it provides useful points for any VAT-registered business to consider when reviewing their VAT control system.
 

The temporary 5% reduced rate of VAT introduced for certain children’s meals, tickets and family attractions ended on 1 September 2026. The relief applied from 25 June 2026 and was intended to reduce the cost of selected activities and services for families during the summer holidays.

The relief covered qualifying children’s meals supplied by restaurants, cafés and similar establishments for consumption on the premises, as well as children’s tickets for cinemas, theatres, shows, concerts and exhibitions. It also applied to admission charges for certain family attractions, including theme parks, amusement parks, zoos, museums, soft play centres and observation attractions.

Businesses should now ensure that any relevant supplies made from 2 September 2026 are treated under the normal VAT rules. Tickets purchased during the relief period for admission on or after 2 September are subject to the standard 20% rate. Businesses should also review advance payments and ensure that VAT has been accounted for correctly based on the relevant time-of-supply rules.

The relief did not apply to all family-related purchases. For example, takeaway meals, sports activities and separately supplied goods or services remained subject to their normal VAT treatment. Businesses should therefore retain appropriate records and continue to use the existing VAT guidance when determining the correct liability for their supplies.

Businesses that register for VAT may be able to reclaim VAT paid on certain goods and services purchased before VAT registration. 

There are specific time limits for claiming pre-registration VAT. VAT on goods can generally be reclaimed where the goods are still held by the business or have been used to produce other goods that are still held by the business. The claim must relate to goods purchased within 4 years before the date of registration.

VAT on services can usually be reclaimed where the services were purchased within 6 months before registration. In both cases, the costs must relate to the business that is now registered for VAT and be attributable to its taxable activities.

Pre-registration VAT should be included on the business’s first VAT return. Businesses should ensure they hold valid VAT invoices and records to support the claim, including details of how any business and private use has been calculated.

There are special rules for certain situations, including partially exempt businesses, businesses with non-business income and significant capital assets covered by the Capital Goods Scheme. These rules can affect the amount of VAT that can be recovered.

It is therefore important for businesses to check the pre-registration rules carefully to ensure that all eligible VAT is identified and claimed correctly. 

Small businesses have several VAT schemes available that can simplify VAT administration and may help with cash flow. However, as a business grows or its circumstances change, it is important to review whether the VAT scheme being used is still the best for your business. 

The main VAT special schemes available to small businesses are the flat rate scheme, the annual accounting scheme and the cash accounting scheme. The turnover limits for joining and leaving each scheme vary, so businesses should check that they continue to meet the relevant conditions.

The flat rate scheme is available to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. Businesses already using the scheme can continue until their turnover exceeds the exit total income threshold of £230,000, including VAT. The scheme simplifies VAT reporting by allowing businesses to pay a fixed percentage of their VAT-inclusive turnover to HMRC, with the percentage depending on the type of business. However, businesses should check whether using the scheme is financially beneficial before applying.

The annual accounting scheme allows eligible businesses to submit one VAT return each year instead of quarterly returns. It can be used alongside the flat rate scheme or with standard VAT accounting. The scheme is available to businesses with taxable turnover of up to £1.35 million and can continue until turnover exceeds £1.6 million.

The cash accounting scheme can improve cash flow by allowing businesses to pay VAT to HMRC when customers have paid them rather than when sales invoices are raised. It is available where estimated VAT taxable turnover is no more than £1.35 million and can continue until turnover exceeds £1.6 million.

Reviewing your VAT arrangements regularly can help ensure you are using the scheme that best fits your business needs.

The Government has launched a consultation on proposals that could significantly change the way VAT is collected on goods sold through online marketplaces. Although the changes are not yet law, they could affect thousands of UK businesses that use online platforms to reach customers.

The consultation forms part of HMRC's continuing efforts to reduce VAT fraud and simplify tax administration. It focuses on extending the responsibilities of online marketplaces, making them more accountable for ensuring the correct amount of VAT is collected on certain transactions.

At present, businesses selling through online marketplaces remain responsible for charging, accounting for and paying VAT where appropriate. Under the proposals, online marketplace operators could become liable for accounting for VAT on a wider range of sales made through their platforms.

The Government believes this approach would reduce errors, improve compliance and create a more level playing field between businesses that already meet their VAT obligations and those that do not.

If the proposals proceed, many online sellers could find that some aspects of their VAT administration become simpler. However, the changes are also likely to require businesses to understand precisely when marketplace operators are responsible for VAT and when responsibility remains with the seller.

Businesses that trade through more than one sales channel may need to pay particular attention. For example, a retailer that sells products through an online marketplace as well as its own website could find that different VAT rules apply depending on where each sale originates.

Although the consultation is still at an early stage, it highlights the direction of travel towards greater involvement of digital platforms in tax collection. Similar approaches have already been introduced in other areas of UK taxation and internationally, reflecting the growing importance of online commerce.

For business owners, the message is not one of immediate action but one of awareness. If your business relies on online marketplaces, it is sensible to keep informed about the consultation and consider how any future changes might affect your accounting systems, invoicing procedures and record keeping.

We will continue to monitor the progress of the consultation and provide updates as further details become available. In the meantime, if you sell goods through online marketplaces and would like to review your current VAT procedures, please contact us. We can help ensure your business remains compliant while identifying opportunities to simplify your VAT administration as the rules continue to evolve.

If you would like to discuss how these proposals could affect your business, please get in touch. We will be pleased to help you understand the potential impact and prepare for any future changes.

Businesses must register for VAT if their taxable turnover exceeds the VAT registration threshold, or if they expect it to exceed the threshold in certain circumstances.

The VAT registration threshold is currently £90,000. The threshold applies to the value of taxable supplies made by a business.

A business must register for VAT if either of the following applies:

1. At the end of any month, the value of taxable supplies made in the past 12 months exceeds £90,000; or
2. At any point, there are reasonable grounds to believe that the value of taxable supplies in the next 30 days will exceed £90,000.

For the first condition, HMRC gives the following example. On 15 July, a business reviews its turnover and finds that taxable supplies made in the previous 12 months total £100,000. This is the first time the business has exceeded the VAT threshold. The business must apply for VAT registration by 30 August, and the effective date of registration will be 1 September.

The second condition can apply where a business knows it will exceed the threshold in the next 30 days. For example, if a business agrees a £100,000 contract on 1 May and payment is due at the end of the month, it must apply for VAT registration by 30 May. The effective date of registration will be 1 May.

The £90,000 threshold also applies to relevant acquisitions of goods from EU Member States into Northern Ireland.

If your business is VAT registered, you can usually reclaim VAT on many of the goods and services you buy for business purposes. However, many businesses fail to claim everything to which they are entitled  and may be able to recover more VAT.

You can normally reclaim VAT on business purchases through your VAT return, provided you hold valid VAT invoices. Where an item is used for both business and personal purposes, only the business proportion of the VAT can be reclaimed. For example, if you work from home or use a mobile phone for both business and personal use, you should calculate and retain evidence of the business element.

You may also be able to reclaim VAT on purchases made before registering for VAT. This generally applies to goods still owned that were purchased within the previous 4 years and services received within the previous 6 months. These purchases must relate to VAT taxable business activities that you supply.

Businesses should also review the special rules that apply to vehicles, fuel and employee travel expenses. While VAT can often be reclaimed on running costs and business travel, restrictions apply to cars used privately, entertainment expenses and items used to make VAT-exempt supplies.

If your business uses the VAT Flat Rate Scheme you cannot usually reclaim VAT on your purchases as this is covered by the scheme. However, VAT can be reclaimed on certain qualifying capital assets costing more than £2,000.

The option to tax is a VAT election that allows businesses to treat supplies of most non-residential land and buildings as taxable rather than VAT exempt. Once an option to tax is made, supplies in relation to that property are generally subject to VAT at the standard rate.

One of the key advantages of opting to tax a property is that it can allow businesses to recover input VAT on related costs, such as the purchase, development and refurbishment of a property, subject to the normal VAT recovery rules.

The decision to opt to tax is normally binding for 20 years and can only be revoked in limited circumstances. It is therefore an important VAT election that should be considered carefully.

HMRC guidance highlights a number of points to consider where changes are made to a property after an option to tax has been exercised:

• Extensions: Where a building that has been opted is later extended, the option to tax will generally apply to the entire extended building.
• Linked buildings: Where two completed buildings are later connected (for example via a covered walkway or internal access), the original option does not automatically extend to the newly linked building if it was previously separate.
• Forming a complex: Where separate units are later combined into a single building or complex, an option to tax made on one part does not automatically apply to the remaining un-opted parts.

The VAT treatment will therefore depend on the physical and legal structure of the property at the time the option is made and any subsequent changes.

Proper advice should always be taken before opting to tax, as it can have long-term VAT implications for both income and capital transactions.

The VAT Cash Accounting Scheme can help businesses improve cash flow by allowing VAT to be accounted for when customers actually pay invoices, rather than when invoices are issued. This can be particularly beneficial for businesses that offer credit terms or experience delays in customer payments.

Under normal VAT accounting rules, VAT is payable to HMRC once an invoice has been raised, even if payment has not yet been received. Using cash accounting helps reduce the risk of businesses funding VAT liabilities from their own resources.

Businesses can normally join the scheme if their estimated VAT taxable turnover is no more than £1.35 million in the next 12 months. Once using the scheme, businesses may continue to do so until turnover exceeds £1.6 million.

However, the scheme is not available in certain situations, including when a business has outstanding VAT returns or payments, has committed a recent VAT offence or is already using the Flat Rate Scheme.

There is no formal approval process required to join. Eligible businesses can start using the scheme from the beginning of a VAT accounting period or from the date of VAT registration if newly registered.

Businesses may also leave the scheme voluntarily at the end of any VAT period and can rejoin later if the eligibility conditions continue to be met.

Businesses that lease cars often assume they can recover all of the VAT charged on car  leasing payments. In practice, the rules are more limited.

Where a business leases a qualifying car, HMRC normally only allows 50% of the VAT on the leasing charges to be reclaimed. The restriction is designed to reflect an element of private use, even where the vehicle is mainly used for business journeys.

The rules are different in certain cases. For example, full VAT recovery is generally available where the vehicle is used as a taxi or for driving instruction, as these are treated as wholly business activities. This would allow qualifying businesses to recover 100% of the VAT charged on the lease.

The 50% restriction can also apply to short-term vehicle hire, including temporary replacement cars. However, where a car is hired for no more than 10 days and is used entirely for business purposes, the VAT block does not usually apply.

These rules can easily be overlooked, particularly where businesses hire vehicles on an ad hoc basis or assume that some business use automatically means full VAT recovery. It is important to ensure that the correct amount of VAT is reclaimed on car leasing costs to avoid issues arising after the fact.