VAT (Value Added Tax)

What is VAT and who needs to register?

Value Added Tax (VAT) is a consumption tax charged on most goods and services supplied in the UK. If you run a business, you may need to charge VAT on your sales, reclaim VAT on your purchases, and submit regular returns to HMRC.

You'll generally need to register for VAT if your taxable turnover exceeds the current VAT registration threshold over a rolling 12-month period, or if you expect it to exceed the threshold in the next 30 days. Some businesses choose to register voluntarily, even if they're below the threshold, so they can reclaim VAT on business expenses.

Setting up VAT in TaxOptimiser

Before you can record VAT transactions or file returns, you'll need to enable VAT in your TaxOptimiser settings.

1. Go to Settings and select Tax & VAT.
2. Toggle VAT registered on.
3. Enter your VAT registration number and effective registration date.
4. Choose your VAT accounting scheme (see the next section).
5. Set your VAT return frequency (typically quarterly, but monthly and annual options exist).
6. Save your changes.

Once enabled, VAT fields will appear on invoices, bills and expense entries throughout the app.

Connecting to HMRC for Making Tax Digital

VAT-registered businesses must comply with Making Tax Digital (MTD) rules. To file returns directly from TaxOptimiser:

1. Open Settings > HMRC Connection.
2. Select Authorise with HMRC.
3. Sign in using your Government Gateway credentials.
4. Grant TaxOptimiser permission to interact with VAT services on your behalf.

You can find more detail in our Making Tax Digital for VAT article.

Choosing a VAT scheme

TaxOptimiser supports the main UK VAT schemes. The right choice depends on your turnover, cash flow and the type of supplies you make.

• Standard (accrual) VAT – VAT is accounted for based on invoice dates, regardless of whether payment has been received.
• Cash accounting – VAT is accounted for when money actually changes hands. Useful if customers pay slowly.
• Flat Rate Scheme – You pay a fixed percentage of your gross turnover to HMRC and generally cannot reclaim VAT on most purchases.
• Annual Accounting – You submit one return per year with interim payments on account.
• Margin schemes – Used for second-hand goods, art, antiques and collectables.

You can change your scheme in Settings > Tax & VAT, but you should only do so from the start of a new VAT period and after notifying HMRC where required.

VAT rates and how to apply them

TaxOptimiser includes the main UK VAT rates as standard options when you create invoices, bills or expenses:

• Standard rate – Applies to most goods and services.
• Reduced rate – Applies to certain supplies such as some energy-saving materials and children's car seats.
• Zero rate – Applies to items like most food, books and children's clothing. VAT is charged at 0% but the sale is still reportable.
• Exempt – Certain supplies, such as some financial services, insurance and education. No VAT is charged and these sales don't count towards taxable turnover.
• Outside the scope – Transactions that fall entirely outside UK VAT rules.

Setting default rates for items

To save time, you can assign a default VAT rate to each product, service or expense category:

1. Open the item in your Products & Services or Categories list.
2. Select the appropriate rate from the Default VAT dropdown.
3. Save the item.

You can still override the default on individual transactions where needed.

Recording VAT on sales and purchases

When you create an invoice or record a bill, TaxOptimiser will calculate VAT automatically based on the rate you select.

On sales invoices

• Select the VAT rate for each line item.
• The net, VAT and gross totals will update automatically.
• Your VAT registration number will appear on the invoice once added in settings.

On purchases and expenses

• Enter the gross amount and choose the correct VAT rate.
• Attach a copy of the supplier's VAT invoice or receipt – this is required to reclaim input VAT.
• For purchases where you cannot reclaim VAT (for example, business entertainment), mark the line as No VAT or Non-reclaimable.

Preparing and submitting a VAT return

TaxOptimiser builds your VAT return automatically from the transactions you've entered during the period.

1. Go to Taxes > VAT returns.
2. Select the open period shown – this is pulled from HMRC via your MTD connection.
3. Review each box on the return. Click any figure to drill down to the underlying transactions.
4. Make any necessary adjustments using the Adjustments panel (for example, partial exemption or fuel scale charges).
5. Once you're satisfied, select Submit to HMRC.
6. Save or download the submission receipt for your records.

Checking your figures before you file

Before submitting, we recommend running through these checks:

• Have all sales invoices for the period been raised?
• Have all supplier bills and expenses been entered with the correct VAT rate?
• Are bank transactions reconciled up to the end of the period?
• Have you reviewed any transactions flagged in the VAT exceptions report?

Tip: The VAT exceptions report highlights transactions from earlier periods that have been added, edited or deleted since your last return. These will be included in the current return automatically.

Paying VAT to HMRC

TaxOptimiser does not collect payment on HMRC's behalf. Once your return is submitted, you'll need to pay any VAT due directly to HMRC by the deadline shown on the submission confirmation.

You can record the payment in TaxOptimiser by:

1. Going to Banking and selecting the account used.
2. Matching the outgoing payment to the relevant VAT liability shown.
3. Confirming the match to clear the liability from your balance sheet.

Correcting errors on past returns

If you spot a mistake on a return you've already filed, the way you correct it depends on the size and nature of the error. Smaller errors within HMRC's adjustment limits can usually be corrected on your next return; larger ones must be reported separately to HMRC.

To make an adjustment in TaxOptimiser:

1. Open the next open VAT period.
2. Select Adjustments.
3. Enter the value and a clear description for your audit trail.

For more detail, see our Correcting VAT errors article.

Deregistering for VAT

If your taxable turnover falls below the deregistration threshold, or you stop making taxable supplies, you can apply to deregister with HMRC. After HMRC confirm your cancellation date:

1. Open Settings > Tax & VAT.
2. Enter your deregistration date.
3. Submit your final VAT return covering the period up to that date.

TaxOptimiser will stop applying VAT to new transactions dated after your deregistration date.

Need more help?

If you're unsure which VAT rate applies to a specific supply, or whether you should register, we recommend speaking to a qualified accountant. You can also visit the HMRC VAT guidance pages for official information, or contact our support team from the help menu inside TaxOptimiser.