---
title: "What is vat?"
description: "VAT explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/vat/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is vat?

Glossary

VAT (value added tax) is a UK tax added to most goods and services at each stage of sale, which a business must register for once its taxable turnover passes £90,000 in a rolling 12-month period, not simply a single fixed tax year.

Updated September 2026

## How vat works

A VAT-registered business charges VAT on its sales, known as output VAT, and can reclaim VAT paid on its own purchases, known as input VAT, as long as those purchases relate to the business. Each VAT period, usually quarterly, the business calculates the difference between output and input VAT and either pays HMRC the balance owed or claims a refund if input VAT exceeded output VAT for that particular period.

Records must be kept digitally and returns submitted through compatible software under Making Tax Digital rules, rather than typed directly into HMRC's online portal by hand each quarter. Getting the VAT scheme right, standard, flat rate or cash accounting, and coding every transaction to the correct rate matters a great deal, since errors carry through each subsequent return until they are found, investigated and corrected.

## Example

A UK consultancy has taxable turnover of £96,000 over the past 12 months, above the £90,000 registration threshold, so it registers for VAT with HMRC without delay. In its next quarter it invoices clients for £24,000 plus £4,800 VAT at 20 per cent, and pays £1,100 VAT on business expenses during the same period. It owes HMRC the difference, £3,700, and submits the return digitally through MTD-compatible software before the deadline passes.

## VAT in QuickBooks Online vs Xero

QuickBooks Online's VAT Centre is MTD-compliant and submits VAT returns directly to HMRC from within the software, drawing figures automatically from coded transactions throughout the quarter. Xero's VAT return report calculates the figures automatically from coded transactions and files them with HMRC through the same MTD connection, with a review step built in before submission.

## Common mistakes

- Transactions get coded to the wrong VAT rate at the time of entry, and the error then carries forward into every return until someone catches it.
- A business keeps trading past the registration threshold without registering for VAT, risking backdated VAT liability once HMRC identifies the late registration.
- Input VAT is claimed on purchases that do not actually relate to the business, which HMRC can disallow and assess a penalty against later.

## Why it matters

VAT directly affects both cash flow and compliance, since a business collects it on sales but owes HMRC the net balance each period regardless of whether customers have paid yet. Errors in coding or registration timing create liabilities that compound across returns and can trigger HMRC penalties. For UK business owners and their accountants, getting VAT coding and registration right protects cash flow and keeps the business clear of compliance risk.

## Related terms

- [Making Tax Digital](https://ledgerbpo.com/glossary/making-tax-digital/)
- [Sales Tax Nexus](https://ledgerbpo.com/glossary/sales-tax-nexus/)
- [GST](https://ledgerbpo.com/glossary/gst/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles vat

We code transactions to the right VAT rate, reconcile the VAT control account each period and prepare draft VAT workings ready for review. You or your accountant approve and submit the final return through MTD-compatible software, we never submit VAT returns on your behalf.

[MTD-compatible VAT returns drafted and reconciled](https://ledgerbpo.com/uk/services/vat-returns/)

Next step

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Source: https://ledgerbpo.com/glossary/vat/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt