VAT explained

Of all the taxes in the UK, VAT is the most straightforward.

If your sales are over £90,000 in a rolling 12 month period, you have to register for VAT 30 days after the date you went over the registration limit. However, if you can show that this was a one off and you won’t go over it again in the following 12 months, then you can apply to HMRC to be exempt from registration.

If your sales are under £90,000 you can still voluntarily register the decision is entirely yours (see below).

You will be a given a VAT number when you register and must quote this on any invoice raised to a customer. The number goes into a national database so it can be checked by anyone to prove it’s real.

The VAT rate is 20% so if in the past you invoiced say £500 to a customer you now invoice £500 plus VAT and show the VAT separately on your invoice, making the total you receive £600. You file a return every 3 months and all the VAT charged to customers must be paid over, less any VAT you have paid out to suppliers. The fact you can claim back VAT you have paid means that you may wish to register voluntarily.

The VAT return is made up of 9 boxes to complete but assuming you have no EU sales or purchases then you will only complete 5 of those, which essentially is the VAT you have charged, the VAT you have paid, the VAT you owe or are owed and the net value of sales and costs.

In the good old days, you would complete a paper form and send it in the post to HMRC with a cheque. Now you file it digitally. Whilst your Government Gateway account has a summary of your VAT, what you owe, deadlines etc you can’t file it through there you have to use a piece of software and unfortunately there isn’t a free program to use. If you file it yourself the cheapest is around £8 a return.

You can also apply to join the VAT flat rate scheme which makes preparing the return even easier. HMRC publish a list of rates you can use depending on what industry you are in e.g. hairdressers can use a 13% rate, mechanics 8.5% and general builders 9.5%.

If you use a flat rate scheme you still charge 20% VAT but only pay over to HMRC the VAT calculated like in the above examples. You can’t however claim any VAT back on your purchases, so it’s a maths exercise before registering as you can’t chop and change once you are on it, if you leave it you are unable to re-join for 12 months.

Shutting a Limited company

If a Limited company owes money, the creditor has obtained a judgment and you don’t pay then that creditor can appoint a liquidator and put your company into receivership in order to try and recover their debt. This is an expensive exercise for the company owed money and therefore the amount due would normally have to be significant.

If you have a few creditors and the reasons for the company ceasing to trade are fairly straightforward, then it is entirely possible for you to shut down the company yourself, you don’t need a liquidator.

There are two reason to shut a company

1)    You don’t owe anybody, the company is solvent but you simply don’t want the company anymore.

2)    You have some creditors you can’t pay and the business is insolvent.

The process for 1) is very very straightforward. You file a striking off form at Companies House and pay a £13 fee. They then post an advert in the Gazette advertising the fact the company has applied to be dissolved and assuming there are no objections to the striking off (which there won’t be as you don’t owe any money), then after a few months the company ceases to exist and that’s that.

Under scenario 2) it’s the same process as for 1) but you should write to all your creditors and explain the company is being struck off. They can then write to Companies House to object and if they accept that objection, then they will pause the striking off for a period of 6 months to allow time for the dispute to be resolved. If an objection just relates to money you owe them, then after 6 months Companies House are unlikely to extend the objection period simply because the company can’t pay. The limited liability protection will therefore kick in and the company will be struck off with you personally not responsible for any of the debt.

Under scenario 2) there are some things to consider. You can’t just take the Goodwill of the business and start a new company leaving the debts behind. If the Goodwill has a value you should buy it from the old company. For example, you are a hairdresser with a client list and you apply to strike off your company still owing some creditors. That client list isn’t your asset personally it’s an asset of the company and if you want to use it in a new company then a payment should be made to acquire it

Finally, with regards HMRC they often don’t object because you owe money it’s the absence of being up to date with things like the corporation tax return which they will object to. Therefore, you need to make sure when you file a striking off form that you are fully up to date with your year end accounts.

Setting up a Business

When you start up a business you will either

-       Be employed but with part time self employment income

-       Start a sole trader or partnership

-       Form a Limited company

Under the first two, the process is the same. You have to register with HMRC that you have self employed income and then file a self assessment tax return every year.  A tax return year runs from 6^th April to 5^th April and you have until the following January to file that return. So, if you begin self employment on say 10^th August 2026, then your first tax year runs from 10-08-26 to 05-04-27 and you need to file a return by 31-01-28.

In the example above, say your tax bill is £2,000. You have to pay this tax on or before 31-01-28 which clears your 26/27 tax year liability. At this point you are 9 months into the tax year 27/28 so HMRC will ask you for a payment on account for that year, which they will calculate as half the previous year’s liability. You pay the second payment on account for 27/28 on 31-07-28.

What this means, taking the above example, is that on 31-01-28 you pay £3,000 (your 26/27 liability of £2,000 plus £1,000 payment on account for 27/28) and then on 31-07-28 you pay £1,000 (your second payment on account for 27/28). If your 27/28 tax liability is calculated as £2,500, then on 31-01-29 you will pay £500 for 27/28 (£2,500 less £2,000 paid on account) and then a payment on account for 28/29 of half £2,500, so £1,750.

This is complicated at the start but once you are into the self assessment system it becomes easier to work out your liabilities and when they are due.

If you form a limited company there is an additional layer on top of the self assessment process. You can form a company at Companies House for £100 and you will then get allocated a formal year end date. If, for example, you form a company in July 2026 you will automatically get a year end date of 30-06-27 (though you can then change that date by completing a form at Companies House).

Once your year end date is up you have 9 months to file those accounts at Companies House and 12 months to file a Corporation tax return with HMRC.  What is bizarre though is that you have to pay Corporation tax 9 months after the year end, which is 3 months before the actual return is due.

As a director, you are still required to complete a self assessment return and if you have a personal income tax liability then the payment for that tax is as per the timetable set out above for sole traders.

No matter what your business type is, if your annual sales exceed £90,000 you have to register for VAT. This is one month after the point you exceed that £90,000.