Tax can be an overwhelming thought: nevertheless, it’s essential to keep on top of it. Part of the trick is knowing when tax obligations apply to you (and when they don’t). In addition, making use of low-cost Making Tax Digital software can reduce stress and get you tax compliant today. Read on to learn when you need to pay VAT, and how to do it.

When do you pay VAT?

First of all, let’s make a clear distinction between paying VAT as customers and paying VAT as businesses (i.e. as sole traders or limited companies):

Paying VAT as a customer

As customers, we all need to pay VAT on products and services we buy. For VAT-taxable items, VAT is usually factored into the price paid by you as the consumer. In this sense, you’re already "paying tax" when you buy things – regardless whether you need to submit VAT Returns to HMRC.

Paying VAT as a business

On the other hand, paying VAT as a sole trader, small business or limited company is a different angle. When running a business or company, you might have an obligation to register for VAT and pay VAT Returns based on your sales.

You must register for VAT if:

  • VAT-taxable turnover over the last 12 months exceeded £90,000 (the ‘VAT threshold’)
  • You expect to turn over more than the VAT threshold in the next 30 days

If one of the conditions above applies to your business, then it is important to register for VAT and use Making Tax Digital for VAT software now.

You must also register for VAT if all of the following apply:

  • your business is based outside the UK
  • you are also based outside the UK
  • you supply goods/services to the UK (or expect to in the next 30 days)

Once you have registered for VAT, you usually need to submit VAT Returns every quarter (every three months). Prices paid by your customers should factor in the applicable VAT.

Being a VAT-registered business involves closely monitoring your finances and calculating your taxable income. It’s important to remember that different products and services are taxable at different rates. Note also that the 2024–2025 VAT threshold is £90,000. VAT rates and the VAT threshold are highly likely to change in the future.

How do you submit VAT Returns?

Once you have established that you need to file VAT, you must start submitting tax returns through MTD for VAT (usually every quarter). Since HMRC’s MTD initiative has kicked in for VAT, it is now mandatory to file VAT online with an MTD-compatible service such as AbraTax. Paper-based VAT Returns are no longer an option in the majority of circumstances.

Conclusion

In summary, it’s actually not as difficult as it sounds. When it comes to VAT, we pay it all the time as customers through our purchases. As a business, however, you only have to submit VAT Returns when turnover reaches the VAT threshold (or if certain conditions apply, relating to business and living abroad).

Luckily, it's easier than ever to meet your VAT obligations: AbraTax provides simple and cost-effective VAT bridging software, allowing you to digitally link your Excel-based bookkeeping with the HMRC MTD platform. We even offer a free trial to get you started!

We also offer free Self Assessment software, including HMRC supplementary pages. This means that you can quickly and seamlessly prepare for Making Tax Digital for Self Assessment today. Why not sign up now?

Disclaimer: We aim to offer educational articles on our blog, focusing on tax-related topics. However, it's important to note that over time, the relevancy of this content might diminish, and we cannot guarantee accuracy. While these articles serve as a tool for enhancing tax knowledge, they are not a replacement for expert advice in accounting, taxation, or legal matters, given the unique nature of each individual's situation. Should you require personalized assistance, we encourage contacting HM Revenue and Customs (HMRC).