About this episode

Value Added Tax can feel confusing, technical, and slightly intimidating. However, if we run a business, VAT can affect our pricing, cash flow, records, customers, and profit. It is not just a tax issue. It is a business finance issue.

In this episode, we explain what VAT is, how taxable supplies work, why some businesses must register, and why some businesses may choose to register voluntarily. We also look at the role of a VAT-registered business as an unpaid tax collector and administrator, and how VAT can affect both B2B and B2C pricing decisions.

What you’ll learn in this episode

• What Value Added Tax means in practical business terms.
• Why VAT is based on supplies rather than just sales.
• The difference between exempt, outside the scope, zero-rated, and standard-rated supplies.
• What it means to become a taxable person for VAT.
• How compulsory VAT registration works in principle.
• Why some businesses choose voluntary VAT registration.
• How VAT can affect pricing, cash flow, and profit margins.

Value Added Tax and your business explained

VAT stands for Value Added Tax. In simple terms, it is a tax charged on taxable supplies of goods and services by a taxable person during the course of business.

That definition may sound formal, but each part matters. VAT is not just about sales. In VAT language, we often talk about supplies. A supply can include selling goods, providing services, renting something out, or even giving something away in certain circumstances.

That is why business owners need to understand VAT before they assume it does or does not apply. VAT can affect what we charge customers, what we can claim back, how we keep records, and how we report to HMRC.

What is a taxable supply?

A taxable supply is one of the key VAT ideas. The episode explains that supplies can fall into different categories, and each category affects VAT in a different way.

Exempt supplies

Some supplies are exempt from VAT. Examples discussed in the episode include certain insurance, postal, and financial services. If a business only makes exempt supplies, it normally cannot register for VAT, which also means VAT charged by suppliers cannot usually be recovered.

Outside the scope of VAT

Some transactions sit outside the scope of VAT. The episode gives examples such as wages, dividends, and tax payments. These are not treated as taxable supplies for VAT purposes.

Zero-rated supplies

Zero-rated supplies are still taxable supplies, but VAT is charged at zero. The episode refers to examples such as baby clothing, newspapers, food, and medicine. The important point is that zero-rated does not mean outside the VAT system. It is still part of the VAT framework.

Standard-rated supplies

Standard-rated supplies are the catch-all category. If a supply is not exempt, outside the scope, or zero-rated, it is generally treated as standard-rated. For VAT-registered businesses, this means VAT must be added at the appropriate rate.

What is a taxable person?

A taxable person is a business that is required to be registered for VAT. That may sound circular, but it is an important concept because VAT responsibilities begin once a business falls into the VAT system.

There are two routes into VAT registration: compulsory registration and voluntary registration. Both create responsibilities, but the reasons for registering can be very different.

Compulsory VAT registration

Compulsory registration applies when a business crosses the VAT registration threshold based on taxable turnover over the relevant rolling period. The key point is that this is not something to check only once a year. It needs regular monitoring.

Once registered, the business becomes an unpaid tax collector and administrator. We must charge VAT correctly, keep the right records, collect VAT from customers, submit VAT returns, and pay over the correct amount to HMRC.

If we do not follow the VAT rules, penalties, interest, and further action can follow. VAT is therefore not something to leave until the last minute or treat casually.

How VAT works in practice

VAT works a little like a seesaw. A VAT-registered business charges VAT to customers on taxable sales. This is often called output VAT. The business may also pay VAT to suppliers on eligible purchases. This is often called input VAT.

The difference between the VAT collected from customers and the VAT paid to suppliers is usually reported on a VAT return. If the business collects more VAT than it pays out, the difference is paid to HMRC. If it pays out more VAT than it collects, it may be due a refund.

The episode uses a simple example. If we bill a client £1,000 and add VAT of £200, the client pays £1,200. That £200 does not belong to the business. It is VAT collected and later paid over through the VAT system, after eligible VAT on costs is taken into account.

Why voluntary VAT registration can make sense

Voluntary VAT registration can sound strange. Why would a business choose extra admin, VAT returns, record keeping, and tax collection duties before it has to?

There are situations where voluntary registration may help. It can create the impression that the business is more established, allow VAT on eligible purchases to be reclaimed, reduce the risk of missing the registration point later, and encourage stronger record keeping.

However, voluntary registration should not be automatic. It depends on the business model, customer base, pricing, costs, and whether customers are VAT registered themselves.

VAT, pricing and profit

VAT can affect pricing in different ways depending on who the customer is. If a business sells mainly to VAT-registered business customers, adding VAT may not be a major issue because those customers may be able to reclaim VAT.

If the business sells mainly to consumers, charities, or customers who cannot reclaim VAT, registration can create a pricing challenge. The business may add VAT on top, which increases the customer price, or absorb some or all of the VAT, which reduces profit margin.

The episode uses Serena the builder as an example. When Serena works with VAT-registered business clients, VAT registration may improve the profit position because VAT on costs can be reclaimed. However, when Serena works with individual consumers, the pricing decision becomes harder because the customer cannot reclaim the VAT.

Practical steps for managing VAT

• Understand which supplies your business makes.
• Separate exempt, outside the scope, zero-rated, and standard-rated supplies where relevant.
• Monitor taxable turnover regularly, not just at year-end.
• Check whether VAT registration is compulsory or voluntary.
• Review whether your customers are VAT registered before changing prices.
• Keep accurate VAT records from the start.
• Set VAT collected from customers aside so it is not treated as normal business cash.
• Get advice before making assumptions about VAT registration or pricing.

Related episodes

• VAT in the UK: How It Works and How to Stay Compliant
• An Introduction to what VAT is
• What is VAT reverse charging?

Key takeaway

VAT can feel scary because it turns a business into both tax collector and administrator. However, understanding VAT gives us more control over pricing, cash flow, profit, and compliance.

The big lesson is that VAT is not just a form to complete. It affects how we price, how we record, how we deal with customers, and how we manage money collected on behalf of HMRC.

If VAT registration, taxable supplies, or pricing decisions feel unclear, visit ihatenumbers.co.uk or listen to the related VAT episodes above to build more confidence with your numbers.

Plan it, Do it, Profit.

“VAT is not just a tax issue. It is a pricing, cash flow, and profit issue.”

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🎧 Enjoyed this episode? Subscribe and leave a review on Apple Podcasts — it helps more business owners understand tax, finance, and their numbers.

Episode Timecodes

• 00:00 – Welcome to the I Hate Numbers podcast
• 00:28 – Introducing VAT and why businesses need to understand it
• 02:14 – What VAT is and how VAT language works
• 03:26 – Exempt, outside the scope, zero-rated, and standard-rated supplies
• 05:31 – What a taxable person means
• 05:53 – Compulsory and voluntary VAT registration
• 07:38 – How VAT works as a seesaw tax
• 09:21 – Why voluntary VAT registration may help some businesses
• 11:05 – VAT, pricing, B2B customers, and B2C customers
• 13:38 – Final thoughts on VAT, pricing, and profit

About the Podcast

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks, and welcome to this week's episode of I Hate Numbers. It's the show that doesn't want you to fall out with your numbers, rather get closer to them, understand them, get a bit more friendly, make money, survive, and thrive. This week's episode is about taxation, more specifically, about VAT. We're not talking vodka and tonic, rather we're talking value added tax.

Now, I'm not going to get involved in the details of VAT, rather give an overview, and you might be thinking to yourself, well, why do I as a business need to worry about VAT? Let me give you some eye-watering statistics. In the UK alone, VAT raises 136.6 billion pounds. That's a lot of zeros. That's a lot of money.

That accounts for approximately 4,800 pounds for each individual household. Approximately 17% of the total tax take that the UK government takes. Now, in context, if you compare it to the rest of the world, the vast majority of countries around the world have a system of VAT or sales taxes. So, this is important to understand and know.

In this week's episode, we are going to specifically look at what VAT actually is. What's the role of a business that's involved in VAT? How does it affect your prices? And bizarrely, there are circumstances where you may actually wish to volunteer to be involved in the system where you don't have to.

Sounds bizarre. Well, let's get on with the show and find out more. In this podcast, I'm going to focus on the UK situation. One thing you will find though, is that all countries that are involved in VAT, that have VAT as part of their tax system, the rules are very similar. So, if you're listening outside of the United Kingdom, there's some fantastic takeaways for you in this episode.

The primary purpose of this episode is to present a framework of VAT and its operations, introduce some terminology, some language that are used by the people in the VAT world. A natural question to ask is, what exactly is VAT? VAT is a tax that’s charged on taxable supplies of goods and services by a taxable person during the course of a business.

Those are specific terms used in the rules about VAT. Now, let's unpick them and see what they actually mean. One of the first phrases that I used in that sentence was taxable supply, which is, I didn't use the word sales because in the context of VAT, a supply can be when you rent something, when you provide services, even when you give things away with no money changing hands, that can still be categorised

as a taxable supply. In the context of what we are referring to here. Think of it normally as selling something, but could also apply when you give something away or when you are hiring or renting something. Now, in the world of VAT, there are three types of supply. Bear with me as we go through them.

Number one, is something called an exempt supply. So, if your business is selling insurance products, postal services, or financial services, what you are providing is what's called an exempt supply. What that means is that your business, your trade, you cannot register for VAT, and if you cannot register for VAT, any VAT that you might be charged by another supplier, you cannot get that back.

Category number two are those transactions that are outside of the scope of VAT. Typically, the payment of wages, the payment of dividends, payment of taxes effectively are outside of the scope of VAT. Lastly for everything else, anything else that's not categorised as exempt, anything that's not categorised as outside

the scope is categorised as a taxable supply. We mentioned taxable supplies and they in themselves are broken down even further into two subheadings. So, bear with me as we go through these next two categories. There are what are called zero-rated supplies. So, if your business involves selling baby clothing, newspapers, food, and medicine, then you are making a supply,

but the amount of VAT that's going to be added to those items is going to be zero. Anything else that doesn't represent an exempt supply, is not outside of the scope of VAT, and is not zero-rated, then that is what's called a standard-rated supply. And what that means is that if you are registered for VAT, and your goods or services are classified standard-rated, then 20% is added to the price of your goods and services.

Let's recap what we've said so far. So, within the idea of taxable supplies, we've said there are three main categories: suppliers that are classified as exempt, insurance, postal services, outside of the scope of VAT, payment of wages, dividends, and taxes, and the taxable supply, typically selling baby clothing, newspapers, food, and medicine will be classified as zero-rated.

If we revisit the initial description of VAT, I talked about taxable supplies, which we've looked at by a taxable person. Now, this is a bit of a circular definition, and a taxable person is a business that is required to be registered for VAT. So, what do the legislators mean that required to be registered?

There are two forms of registration. There is one that is compulsory i.e. you have no choice over the matter, and the second one is where you volunteer to be registered. Why somebody would want to do that? Sounds a bit crazy. We’ll pick up later on in the podcast. Let's talk about compulsory registration and what does it mean.

What's the implications of registering for VAT? Based on current UK limits, if your business has a turnover over the last 12 months of 85,000 pounds plus, then you have no choice and you must register for VAT. And remember, that turnover is based on standard-rated or zero-rated supplies. So, if your business provides training courses, for example, and over a last 12-month period, it's generated more than 85,000 pounds worth of business,

tick the box. You have to be registered. If your business is an insurance company and that's all you provide, then you don't register irrespective on what the level of turnover is. If your business is one of retailing food, then once it triggers 85,000 pounds a year plus, so you could be a bakery, then you have to register for VAT.

What does that actually mean? Well, once you are registered for VAT, your role is effectively an unpaid tax collector and the administrator. So, you have a responsibility, not one by choice, but one that's imposed on you to charge VAT at the appropriate rates, to keep the relevant records of the VAT, and to collect the tax from your customers of the VAT that you charge them.

Now, VAT is a bit of a seesaw tax. Let me use my own business as an illustration. I provide services to a client. I work out how much I'm going to charge that client, let's say for an argument's sake, it’s a thousand pounds. I will bill that client a thousand pounds. I will have to add 20% VAT to that and the client

then has to pay me 1200 quid of which 200 pounds is what I have to pay over to the government. Now, it's a seesaw tax because I'm likely to have bills as well to running my business. It'd be great if I didn't, but that's going to happen. So, other suppliers will provide goods and services to me. I will pay their bills, and if they charge me VAT, I have to pay that as well.

So, let's imagine in a typical period of time, I've charged my customers 200 quid. My suppliers would charge me, say, 50 quid worth of VAT. I compare the two numbers. What I have is a situation where I've collected 200 pounds from my customers. I've paid out 50 pounds worth of VAT to my suppliers. The difference is 150 pounds, and that's the amount of money that I have to pay over to the government.

Typically, for most businesses in the UK, you have to complete a VAT return. Once a quarter, so every three months a form will be completed showing how much VAT you've charged your customers, how much VAT you paid out to supplies. The difference is either paid over to the government, or if in a particular period of time

you've not sold anything or not sold a great deal, but you've bought a lot of goods, you've paid for a lot of services, and you've paid out more VAT than you've collected, then you will get a refund back from our friends at HMRC. We talked about compulsory registration, that situation where you trip and reach that magic threshold, then you must register for VAT.

Take note. Anything to do with taxation, if you do not comply with the rules, then you'll be fined. You will incur penalties, and in a worse case situation, if you're being really, really naughty, you can be prosecuted. Let's talk now about voluntary registration. It sounds crazy. Why would a business wish to enter a system where they've got administration responsibilities?

They've got to collect the taxes, they've got to make sure their records are up to speed. If they get it wrong, they will potentially be fined. They will pay penalties and interest. So, why would somebody wish to enter such a system on a voluntary basis? Let me give you the upside of why it can pay to voluntarily register for VAT.

Number one, you can create that impression that your business is larger than it actually is. It may make an impact on your customer base. Number two, you will be able to get back the VAT that you're paying on goods and services, which can be a benefit for your cash flow. Number three, you can prevent any future problems when the limits are exceeded.

So, remember, it's your responsibility as a business to keep an eye on that rolling 12-month turnover. Once you go over the limit, you have to register within a certain period of time. If you don't, slap on the wrist, and a penalty will ensue. So, you may think, do you know what? Life is easier if I register and I don't have to keep an eye on what's going on on my turnover.

Number four, I find really beneficial. It imposes a discipline on your business to keep accurate records. And on previous podcasts we've talked about good records equals good information, good way to manage your business, so therefore that's a good thing. And lastly, you can make more profits. How? Well, let's find out.

We're going to find out by looking at an illustration and let's throw some numbers in there just to make life more interesting. For this example, we're going to look at Serena, who is currently a non-VAT registered builder. Now, Serena has two types of clients. She's got business clients for which she does building work, and she's got consumer clients, individuals, members of the public for which she also does building work.

Currently, when she does her job, she charges 600 pounds for her services and she's got costs to the tune of 120 pounds, so she makes a profit of 480 pounds. Pretty good. Now, if she decides to register for VAT, first of all, she'll have to add 20% to the price of her services, so when she does work for her business client, the bill to them will be 720 pounds.

She will have collected 120 pounds worth of VAT off that customer. Now, the materials and the goods that she buys in has cost her 120 quid. Let's assume that there's VAT in that bill, so that's 20 pounds that she's paid over to her supplier. Now, if she works out how much VAT she's got to pay over, that's 120 pounds she's collected.

That's 20 pounds to the supplier, and that's a hundred pounds that gets paid over. And the way it'll work is Serena will make a profit now of 500 quid. Not bad. That's effectively an increase of what she had before. Now, when it comes to her individuals, other category of client, the consumer, the individual,

Serena's got a tough decision to make here. Now that she's VAT-registered, if she adds 20% to her price, that means the individual will pay 720. Now, because the individuals cannot be VAT-registered, that represents a big price hike for them. And Serena might think, actually, I'm going to price myself out of the marketplace.

So, she may decide initially to absorb that VAT. So, she still charges 600 pounds to that customer. Now, unfortunately, when it comes to paying over the VAT, the 600 quid will include VAT. She has to pay that out of, effectively, her profit margin. Consequence of that is that Serena will suffer a profit reduction.

If you are selling B2B and those business-customers are VAT registered, you will make more profit if you're selling B2C, which is the acronym for business to consumer, where those individuals are not registered, or you might be providing services to a charity, which also isn't VAT-registered, then your profit margins will drop if you don't increase your pricing accordingly.

So, what can we say in summary. VAT is potentially quite a scary tax. You are the tax collector, the administrator, and if you are selling largely B2C, then potentially VAT will represent a price hike. That's assuming that you put your prices up. That's assuming you can't find efficiency gains in your business.

But for me, also, VAT, if you have to register, represents an improvement in your profit trajectory, in your business direction. So, look at that as a positive thing here. So, ladies and gentlemen, I hope you've got some value out of this podcast. If you check the show notes at the end, there's an illustration of the numbers that we talked about earlier.

Hope you love the show. Give us some feedback. Have a listen, leave a review, and have a great week ahead. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.