Value Added Tax (VAT) is a consumption tax added to most goods and services in the UK. If your business turnover exceeds the registration threshold, you must register for VAT, charge it on your sales, and pay it to HMRC. This guide covers the essential rules, schemes, and decisions you need to get right.
VAT Basics
| Feature | Detail |
|---|---|
| Standard rate | 20% |
| Reduced rate | 5% (some goods and services) |
| Zero rate | 0% (still VAT-registered, but charge no VAT) |
| Exempt | Outside the VAT system entirely |
| Registration threshold | £90,000 (since April 2024) |
| Deregistration threshold | £88,000 |
How VAT Works
- You charge VAT on your sales (output VAT)
- You pay VAT on your business purchases (input VAT)
- You pay the difference to HMRC (or reclaim if input exceeds output)
Example:
| Transaction | Net | VAT (20%) | Gross |
|---|---|---|---|
| You sell services | £1,000 | £200 | £1,200 |
| You buy supplies | £300 | £60 | £360 |
| VAT owed to HMRC | — | £140 | — |
When You Must Register
Compulsory Registration
You must register if:
- Your taxable turnover exceeds £90,000 in any rolling 12-month period (looking backwards), or
- You expect your turnover to exceed £90,000 in the next 30 days alone
You must register within 30 days of the date you exceeded (or expect to exceed) the threshold.
What Counts as Taxable Turnover
- Sales of standard-rated goods and services (20%)
- Sales of reduced-rated goods and services (5%)
- Sales of zero-rated goods and services (0%)
- Not included: Exempt supplies and sales outside the UK (generally)
Monitoring Your Turnover
Check your rolling 12-month turnover regularly — at minimum, monthly. A sudden large contract or seasonal peak could push you over the threshold unexpectedly.
Voluntary Registration
You can register voluntarily even if below the threshold. Consider it if:
| Advantage | Disadvantage |
|---|---|
| Reclaim VAT on business expenses | Must charge VAT on sales (may increase prices for consumers) |
| Appear more established/professional | Additional admin and record-keeping |
| Essential if selling B2B (business customers expect VAT invoices) | Must file VAT returns (quarterly) |
| Unlock VAT schemes (Flat Rate, Cash Accounting) | Possible cash flow impact |
B2B businesses benefit most from voluntary registration because their customers can reclaim the VAT charged. B2C businesses may find that adding 20% to prices reduces demand.
How to Register
Online Registration
- Create a Government Gateway account (if you don’t have one)
- Go to HMRC’s online VAT registration service
- Provide business details, turnover information, and bank details
- Receive your VAT registration number (typically within 30 working days)
- Start charging VAT from your effective date of registration
VAT Schemes
Standard VAT Accounting
You charge VAT on every sale, reclaim VAT on every purchase, and pay the difference each quarter. Good for businesses with significant expenses.
Flat Rate Scheme
Pay a fixed percentage of gross turnover instead of tracking input/output on every transaction:
| Industry | Typical Flat Rate |
|---|---|
| Accountancy | 14.5% |
| Computer repair | 10.5% |
| Management consultancy | 14% |
| Hairdressing | 13% |
| Retailing (food) | 4% |
| Construction | 9.5% |
Benefits: Simpler admin, potentially lower VAT bill if you have few expenses. Drawback: Cannot reclaim input VAT (except on capital goods over £2,000).
New businesses get an additional 1% discount in their first year of VAT registration.
Cash Accounting Scheme
Only account for VAT when you receive and make payments — not when invoices are issued. Benefits:
- Better cash flow (don’t pay VAT until customer pays you)
- Automatic bad debt relief
- Available to businesses with turnover under £1.35 million
Annual Accounting Scheme
Submit one VAT return per year instead of four, with interim payments based on estimated liability. Reduces admin but requires good cash flow management.
VAT Returns
Under standard accounting, you file a VAT return every three months (quarterly), due one month and seven days after the quarter end.
Since Making Tax Digital for VAT became mandatory, all VAT returns must be submitted using compatible software.
| Return Period | Filing + Payment Deadline |
|---|---|
| Jan–Mar | 7 May |
| Apr–Jun | 7 August |
| Jul–Sep | 7 November |
| Oct–Dec | 7 February |
Common VAT Mistakes
- Late registration — missing the threshold triggers backdated VAT liability and penalties
- Charging VAT before registration — you cannot charge or display VAT until registered
- Incorrect flat rate percentage — using the wrong industry rate
- Not keeping VAT records — invoices must show VAT registration number, rate, and amount
- Mixed supplies — incorrectly treating exempt or zero-rated supplies as standard-rated
- Missing the filing deadline — triggers default surcharge or penalties under the new regime
When to Deregister
You can (and sometimes should) deregister if your taxable turnover drops below £88,000. Deregistration removes the admin burden and means you stop charging VAT. However, you may need to account for VAT on stock and assets at deregistration.
For more on managing your tax as a small business, see our self-employment tax guide and use our self-employment tax calculator to estimate your overall tax position.