VAT Threshold
£90,000
Getting that VAT bill from HMRC is rarely a moment of joy. But what if you could legally reduce that figure? Managing your VAT effectively means making sure you're not paying a penny more than you need to.
Managing your VAT effectively isn't about finding dodgy loopholes; it's about understanding the system. By being smart and organised, you can significantly improve your cash flow and reduce your payments to HMRC. Here are ten practical ways UK small businesses can tackle their VAT bill.
Proactive VAT planning, with expert support, can legally reduce liabilities. One key area is ensuring your business structure is appropriate and not subject to 'disaggregation' rules.
Example:
Imagine you run a plumbing business through your limited company, and you also have a side hustle cleaning carpets, run through the same company. The combined turnover exceeds the £90,000 VAT threshold, forcing you to register.
However, if these are genuinely separate business activities, they could potentially be run as separate legal entities (e.g., one as a limited company, one as a sole trader). If each entity's turnover remains below the threshold, neither may need to register for VAT.
Crucial Note:
This is a complex area known as disaggregation, and HMRC has strict rules against "artificial separation" done purely to avoid VAT. You must seek professional advice before making any decisions on business separation to ensure you are fully compliant with the VAT Act.
Once you're VAT registered, you act as a tax collector for HMRC. This means you must add the appropriate VAT rate (usually 20%) on top of your prices for goods and services. Many business owners worry this will make them uncompetitive, so they absorb the cost themselves. This is a critical mistake.
Critical Mistake:
The VAT you collect is not your income. It belongs to HMRC. Failing to add it to your prices means you are paying the government out of your own pocket and directly hurting your profit margins.
Solution:
Be upfront with customers; VAT is a standard part of business for any growing company.
This is the absolute foundation of VAT management. Input VAT is the VAT you pay on goods and services for your business. You can reclaim this from HMRC, directly reducing the amount you owe. Too many businesses miss out.
Are you claiming for everything you can? Common examples include:
Stock & Materials
Raw materials for producing your goods
Office Essentials
Stationery, software, computer equipment
Overheads
VAT portion of business utility bills
Professional Fees
Accountant's or solicitor's fees
Marketing & Advertising
Website hosting, online ad spend, promotional materials
Action Point:
Go through your expenses from the last quarter. Have you got a VAT receipt for every business purchase? If not, make it a habit to always ask for one.
You don't have to stick with the standard VAT scheme. HMRC offers several alternatives designed to simplify life for small businesses.
Pay VAT when you get paid, not when you issue an invoice. This is a game-changer for cash flow, especially if you have slow-paying clients.
Eligible if: Turnover is £1.35 million or less
Pay a single, fixed-rate percentage of your turnover to HMRC, simplifying your bookkeeping. This can sometimes result in paying less VAT, but you generally can't reclaim input VAT. You must calculate if it's right for you.
Eligible if: Turnover is £150,000 or less
Submit one VAT return per year instead of four. This reduces admin and helps with budgeting through regular advance payments.
Benefit: Less frequent filing, easier budgeting
If you or your employees use vehicles for business, you can reclaim VAT on fuel. You have two main options:
Option 1:
Reclaim all VAT on fuel and pay a fixed "fuel scale charge" to account for private use
Option 2: ⭐ Recommended
Only reclaim VAT on fuel used for business journeys (requires detailed mileage records)
For most small businesses, keeping a mileage log is often more tax-efficient.
Don't pay VAT on money you never received. If a customer fails to pay an invoice and the debt is over six months old and written off in your accounts, you can reclaim the VAT you originally paid to HMRC for that sale.
Cash Flow Benefit:
This can provide welcome relief if you've been stung by non-paying customers.
This is a common point of confusion. The rules are clear:
Client Entertainment
You cannot reclaim VAT on entertaining clients or customers
Staff Entertainment
You can reclaim VAT on staff parties and events (like a Christmas party), provided the event is for all staff
Did you incur costs before your business was VAT registered? You may be able to reclaim that VAT on your first return.
Goods:
Go back 4 years for goods you bought that you still own or have used to make other goods you still hold
Services:
Go back 6 months for services
Cash Injection:
This can provide a welcome cash injection right when you need it.
This is a simple but effective cash flow tip.
Large Business Purchase:
If you're about to make a large business purchase near the end of a VAT quarter, consider bringing it forward. This allows you to reclaim the input VAT sooner, reducing the immediate bill.
Large Sales Invoice:
You could delay issuing a large sales invoice until the start of the next quarter, giving you three extra months to hold onto the cash before paying the output VAT.
Finally, change your perspective. It's impossible to make a profit from the VAT you collect, and it's impossible to avoid registration once your turnover hits the threshold.
Instead of seeing VAT as a problem, accept it as a sign of success. Your business is growing! 🎉
Focus your energy on continuing that growth and improving profitability, treating VAT management as just another professional part of running a successful enterprise.
Disclaimer: This blog post is for informational purposes only and does not constitute professional financial or tax advice. You should always consult with a qualified accountant to discuss your specific business circumstances.
VAT management can be complex, and the wrong decisions can cost you thousands. Our expert accountants can help you choose the right VAT scheme, maximise your claims, and ensure you stay compliant.
Expert VAT advice • Scheme selection • Maximise claims
Plan business structure carefully (avoid disaggregation issues)
Always charge VAT on top of your prices
Claim every penny of input VAT (keep all receipts!)
Choose right VAT scheme (cash, flat rate, or annual)
Reclaim VAT on business fuel and mileage
Use bad debt relief for unpaid invoices (6+ months)
Reclaim VAT on staff entertainment (not client entertainment)
Claim pre-registration VAT (4 years goods, 6 months services)
Use strategic timing for purchases & invoices
See VAT as a growth metric - your business is successful!