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VAT (Value Added Tax) is a tax charged on most goods and services that VAT registered business provide in the UK.

Every VAT registered business must charge VAT when selling goods or provide services. The VAT paid on the goods and services bought can be reclaimed from HMRC.

Currently the standard VAT rate is 20%. Some goods and services e.g. Medical services are exempt from VAT.

Vat is always calculated on Net sales. In other words, if you charge your agency £1000, as a VAT registered company you have to collect additional 20% which is £200 (1000*.20). Therefore you will invoice your client £1200 instead of £1000.


You must register for VAT if

  • your turnover for the previous 12 months has gone over a specific limit - called the 'VAT threshold' (currently £73,000)
  • you think your turnover will soon go over this limit


You can choose to register for VAT if you want, even if you don't have to.

If your VAT taxable turnover is less than £150,000, you can register for Flat Rate VAT Scheme.

Under the flat rate scheme, you cannot reclaim VAT paid on the purchases, but the difference between VAT collected from your clients and VAT paid to the tax man is the income of your company.

Flat Rate VAT rate is different for each company depending on the industry they work in. The illustration below explains how the Flat Rate Scheme works based on a Flat Rate of 11%.

  Standard VAT Flat Rate VAT
  £ £
Invoice Amount per week 1000 1000
VAT charged to clients (20%) 200 200
Total amount received 1200 1200
VAT paid to HMRC 200 132 (11% of 1200)
Benefit to the company   68


VAT return needs to be submitted every three months online. VAT is also paid on quarterly basis.



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