Navigating VAT for the first time can be a daunting experience for new business owners. Becoming VAT registered means understanding various rules about exempt and zero-rated items, as well as handling reverse charge VAT correctly. Missteps can lead to missed reclaim opportunities or compliance issues, impacting your business’ bottom line. We’re here to simplify these complexities and help you confidently manage your VAT responsibilities. Here are 6 important points you should look out for, to ensure your smooth transition.
Understanding Exempt Items
Certain expenses are classified as exempt from VAT, which means you won’t be charged VAT on them, and they should be entered under the exempt expenses VAT code in your accounting software. The main exempt items that you are likely to purchase for your business are insurance, bank fees (but not merchant fees like Go Cardless charges), professional membership subscriptions and Royal Mail postage.
Identifying Zero-Rated Items
Zero-rated items allow you to purchase goods or services without paying VAT. Common zero-rated expenses for businesses include:
Travel:
The main zero-rated items you purchase are likely to be travel related. UK bus and railway tickets are zero rated although Trainline charges standard rate VAT on booking fees.
Parking fees:
Car parking can be zero rated or standard rated depending on where you are parking and whether it is local authority or commercial parking. Often, if there is a booking fee then that is standard rated even if the parking charge is zero rated.
Food from grocery stores and supermarkets:
This relates to subsistence claims and it can be a little tricky. A lot of food bought from grocery stores and supermarkets is zero-rated but food from restaurants and cafes generally isn’t, and even some food bought from food stores, such as crisps and chocolate, are standard rated.
Other zero-rated items:
Don’t forget that goods and services from non-VAT registered suppliers are entered as zero-rated, as are payments where you’ve lost the invoice or receipt so that you don’t have any paperwork to back up a claim for VAT.
Handling Reverse Charge VAT
Any invoice for services (not goods) supplied by a company based abroad needs to be entered in your accounting software as having a reverse charge VAT rate. When things are set up properly with the supplier you should receive an invoice without any VAT on it. However, sometimes this does not happen, and it can become complicated when the supplier is supplying digital services – things like software, digital marketing fees, website domain rental etc – to both businesses and consumers. When this is the case, the supplier must obtain a UK VAT number and charge UK consumers VAT, so if you don’t let them know you are a VAT registered business, they will issue you with a standard rate VAT invoice thinking you are a consumer. If this happens you cannot claim the VAT back, even though the company has a UK VAT number.
To avoid having to pay VAT on services bought from businesses based abroad it is very important that you contact these companies and give them your VAT number so that they can issue you with the correct reverse charge invoice without VAT. Look out for suppliers such as GoDaddy, Calendly, Google, Adobe, Facebook, Etsy & Toggl. Some suppliers like Microsoft can be more complex as they are registered in the UK for some of their services but not others.
Correct Use of the No VAT Box
The NO VAT box on the VAT return should only really contain items such as payroll entries, journals, pension entries, working from home and mileage allowances and charitable donations.
Invoices with Non-UK VAT Numbers
UK VAT numbers begin with GB but occasionally you may get an invoice with a VAT number and breakdown where the VAT number begins with different letters – IE for Ireland is the most common one. You cannot claim the VAT back on these invoices via the UK VAT system. Usually, they are invoices issued because the company thinks you are a consumer. Sometimes they are invoices that should be a reverse charge invoice, either way you cannot claim the VAT back and they must not be entered using the standard rate VAT code.
Importance of Proper Documentation
One of the hardest things to contend with when you’re VAT registered is getting the right documentation from suppliers. It is surprising how many large companies do not issue a VAT invoice unless the customer asks for it, or who make it very difficult to find their VAT invoices even when they do issue them! A valid VAT invoice must have the VAT number on it. An invoice that has a VAT breakdown is not valid unless it also shows a UK VAT number. It is quite common for invoices like that to be rejected during a VAT inspection so always make sure your paperwork has a VAT number on it just to be on the safe side. If you have a VAT receipt from a shop and the VAT number is on the back of the receipt, then always upload both sides of the receipt into your accounting software.
Being VAT registered comes with its unique challenges, but understanding these fundamentals will help you navigate through them more effectively. Ready to Simplify Your VAT Processes? BW Business Accountants & Advisers are here to help you manage your VAT responsibilities effectively and ensure compliance. Contact us today to get started on making your financial journey smoother!
Want more insights on managing your business finances? Read Master Year-End Accounting for Business Success.
Disclaimer: The information mentioned in this blog was correct at the time of posting (March 2025) and has not been updated for any future changes in tax law or HMRC practice. The contents of this blog has been produced as a helpful reference point, and the information provided should be used as a guide only. You should discuss your specific circumstances directly with us before taking any action based on the information included in this blog.