UK VAT Guide for Small Businesses

What is VAT?

VAT (Value Added Tax) is a consumption tax charged on most goods and services sold in the UK. Businesses collect VAT on behalf of HMRC and pass it on, minus any VAT they have paid on purchases (input VAT).

VAT registration threshold

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period (as of April 2024). You can also register voluntarily if your turnover is below this — useful if your customers are VAT-registered businesses who can reclaim VAT.

• Mandatory registration — When turnover exceeds £90,000
• Voluntary registration — Any time if it benefits your business
• Registration deadline — Must notify HMRC within 30 days of exceeding the threshold

UK VAT rates

How to register for VAT

1. Register online via your HMRC online account. Most businesses are registered within 30 working days.
2. You will receive a VAT registration number (9 digits, e.g. GB123456789).
3. Display your VAT number on all VAT invoices.
4. Start charging VAT from your effective date of registration.

Making Tax Digital (MTD) for VAT

All VAT-registered businesses must use MTD-compatible software to keep digital records and submit VAT returns. This has been mandatory since April 2022 for all businesses.

• Use accounting software such as Xero, QuickBooks, Sage, or FreeAgent
• VAT returns are submitted digitally — no more paper returns
• Keep digital records of all VAT transactions

Filing VAT returns

Standard VAT returns are filed quarterly. You must:

1. Calculate output VAT (VAT charged to customers)
2. Subtract input VAT (VAT paid on business purchases)
3. Pay the difference to HMRC (or reclaim if you're in credit)
4. File and pay within 1 month and 7 days after the end of each VAT period

Reclaiming input VAT

You can reclaim VAT on purchases used for your business. You need a valid VAT invoice from your supplier showing their VAT number. You cannot reclaim VAT on:

• Business entertainment
• Cars (unless used exclusively for business)
• Purchases for personal use

VAT schemes for small businesses

Flat Rate Scheme

Pay a fixed percentage of your gross turnover to HMRC (varies by sector, e.g. 12% for IT consultants, 9% for architects). Simpler bookkeeping. Available if turnover is under £150,000. Beneficial if your input VAT is low.

Cash Accounting Scheme

Pay VAT when your customers pay you (not when you invoice). Protects cash flow if customers pay late. Available if turnover is under £1.35 million.

Annual Accounting Scheme

File one VAT return per year instead of four. Make 9 monthly or 3 quarterly interim payments based on estimated liability. Available if turnover is under £1.35 million.

Use our free VAT Calculator

Frequently Asked Questions

What is the VAT threshold in 2024?

The VAT registration threshold in 2024/25 is £90,000. You must register if your taxable turnover exceeds this in any rolling 12-month period, or if you expect to exceed it in the next 30 days. The threshold increased from £85,000 to £90,000 from 1 April 2024.

Can I claim VAT back before registering?

Yes, in limited circumstances. Once registered, you can reclaim VAT on goods purchased up to 4 years before registration (if you still hold them for business use) and on services purchased up to 6 months before registration. You must hold valid VAT invoices for all claims.

What is the difference between standard and reduced rate VAT?

Standard rate VAT is 20% and applies to most goods and services. The reduced rate is 5%for domestic fuel, children's car seats, and certain energy-saving materials. Zero rate (0%) applies to most food, children's clothing, books, and new residential buildings — VAT is charged at 0%, so input VAT can still be reclaimed. Exempt items (insurance, finance, healthcare) have no VAT and input VAT cannot be reclaimed.

Do I need to charge VAT on services?

If you are VAT-registered, you must charge VAT at the appropriate rate on most UK services — usually 20%. Some services are zero-rated or exempt. For services supplied to VAT-registered businesses in other countries, the reverse charge mechanism usually applies and you do not charge VAT.

What is Making Tax Digital for VAT?

Making Tax Digital (MTD) for VAT requires all VAT-registered businesses to keep digital records and submit VAT returns using MTD-compatible software. Mandatory for all VAT-registered businesses since April 2022. Compatible software includes Xero, QuickBooks, Sage, and FreeAgent. HMRC no longer accepts manual VAT returns for most businesses.