⚡ Quick Answer
VAT (Value Added Tax) is charged on most UK goods and services at 20% (standard rate). You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. You can also register voluntarily below that threshold. Once registered, you add VAT to invoices, reclaim VAT on business purchases, and pay the difference to HMRC quarterly. Making Tax Digital for VAT requires digital records and software-based filing for most registered businesses.
VAT registration is something many growing businesses encounter unexpectedly. Revenue approaches £90,000 and suddenly the question of whether to pass a 20% charge on to customers — and how — becomes genuinely pressing. Understanding the rules clearly, and the options available, allows for proper planning rather than a rushed response when the threshold looms.
How VAT Works
VAT operates as a chain. At each stage of the supply chain, the business charges VAT (output tax) on its sales and reclaims VAT (input tax) it pays on business purchases. It pays HMRC the difference — or receives a refund if input tax exceeds output tax.
Example: you charge a client £1,000 + 20% VAT = £1,200 invoice. You pay a supplier £300 + VAT = £360. Your VAT payment this quarter: £200 (VAT collected) minus £60 (VAT paid) = £140 to HMRC. Your client and supplier bear the VAT economically; you collect and remit it.
VAT Rates
- Standard rate (20%): most goods and services
- Reduced rate (5%): domestic fuel, children’s car seats, certain energy-saving materials, some health products
- Zero rate (0%): most food, children’s clothing, books, most public transport, prescribed medicines
- Exempt: some services (financial services, insurance, education, healthcare) — exempt suppliers cannot register for VAT or reclaim input VAT on costs relating to exempt supplies
The Registration Threshold
The registration threshold for 2026/27 is £90,000 in taxable turnover over any rolling 12-month window — not just your financial year. Exceeding £90,000 in any consecutive 12-month period triggers a mandatory registration requirement within 30 days.
Failure to register when required results in HMRC assessing VAT on all supplies since the date you should have registered, plus penalties and interest. Monitoring your rolling 12-month turnover is essential as you approach the threshold.
Voluntary Registration
Voluntary registration is appropriate if: most clients are VAT-registered businesses who can reclaim your VAT (meaning it doesn’t increase their effective cost), and you have significant input VAT to reclaim on business purchases. It’s less suitable if your customers are primarily consumers who bear the full VAT cost — effectively raising your prices by 20% relative to competitors below the threshold.
VAT Schemes for Small Businesses
Flat Rate Scheme
Available for businesses with VAT-exclusive turnover below £150,000. You pay a fixed percentage of gross turnover to HMRC instead of calculating precise input and output VAT. Simpler to administer, and sometimes generates a small saving if your input VAT is low relative to your sector’s flat rate.
Cash Accounting Scheme
Account for VAT only when you actually receive payment, not when you invoice. Helpful for businesses with slow-paying clients — you don’t pay VAT before being paid. Available below £1.35 million turnover.
Keeping VAT records correctly is part of keeping business finances well-organised — our article on separating business and personal finances covers the foundations.
Frequently Asked Questions
What is Making Tax Digital for VAT?
Most VAT-registered businesses must keep digital records and submit VAT returns through MTD-compatible software (Xero, QuickBooks, FreeAgent etc.). This has been mandatory for most businesses since 2019 and applies to virtually all registered businesses in 2026.
Does VAT apply to services provided overseas?
The place of supply rules determine whether UK VAT applies. For digital services and many B2B services to overseas businesses, the customer may be responsible for accounting for VAT under reverse charge rules. This area is complex — specific advice from an accountant is recommended for businesses with significant international revenue.
Register for VAT at HMRC’s VAT registration page.
