VAT plays a large role in the day-to-day finances of many UK businesses. From how you price your products to what you can claim back on purchases, it’s not just another tax, it’s a system that affects both your income and your outgoings.
In short, VAT is a tax added to most goods and services, and if your business is VAT registered, you’re responsible for charging it, recording it, and submitting regular returns to HMRC. But with multiple schemes, rates, and rules to consider, it’s not always straightforward.
In this guide, we’ll help make the complex clearer. Whether you’re wondering when you need to register, how VAT is paid, or what you can claim back, we’ll break it all down for you.
What Is VAT?
Value Added Tax (VAT) is a type of tax that’s added to the price of most goods and services sold in the UK. From buying materials to invoicing customers, it’s a running thread in most business transactions and something you’ll need to manage carefully once your business grows past a certain size.
Unlike Corporation Tax or Income Tax, which apply to profits, VAT is a consumption tax. That means it’s ultimately paid by the end consumer, but it passes through your business on the way.
When you sell a VAT-able product or service, you add VAT to the sale price. That’s the amount your customer pays you and then you pay the VAT collected over to HMRC.
This doesn’t mean your business is losing out. Because when you buy goods or services from other VAT-registered businesses, you’re usually charged VAT too. That VAT can be reclaimed, meaning you get to offset it against the VAT you’ve collected.
The result is that you’re only passing on the difference between what you charge and what you pay. It’s a system designed to tax the “value added” at each stage of the supply chain.
How Does VAT Work for a Business?
When your business is VAT-registered, you charge VAT on your sales (output tax) and reclaim it on eligible purchases (input tax).
The difference is reported to HMRC in your VAT return. If you’ve collected more than you’ve paid, you owe the balance. If it’s the other way around, you can claim a refund.
It’s important to understand that VAT is calculated based on your turnover, not your profit. So, even if you’re not making a huge margin, you could still owe VAT if your sales have crossed the VAT threshold.
This often raises the question: Do you pay VAT on profit or turnover? The answer is turnover. VAT is charged on your sales, regardless of your bottom line.
This is why it’s crucial to monitor your income and stay on top of your VAT obligations. Not only does it affect your cash flow, but it’s also one of the areas HMRC takes seriously when it comes to penalties and audits.
VAT Registration for Businesses
When Does a Business Need to Register for VAT?
If your business’s taxable turnover reaches £90,000 in any rolling 12-month period (2025/26 threshold), you’re legally required to register for VAT with HMRC.
Even if you haven’t yet reached the threshold, you can choose to register voluntarily. This can actually be beneficial for some businesses, especially if you:
- regularly work with VAT-registered clients who can reclaim the VAT you charge.
- want to reclaim VAT on your own business purchases.
- feel it adds credibility when dealing with larger firms.
Just be aware that once you register, you’ll have to apply VAT to all taxable sales and submit regular returns, so it’s worth weighing up the admin commitment before signing up early.
What Counts as Taxable Turnover?
Taxable turnover is the total value of everything you sell that isn’t exempt from VAT. It includes standard-rated, reduced-rated and zero-rated sales, even if you’re not actually charging VAT yet.
It doesn’t include:
- Sales of VAT-exempt goods or services (such as certain financial or health services).
- Sales made outside the scope of UK VAT.
Let’s say you’re a plumber fitting bathrooms– all your work is likely standard-rated. If you’re an online seller shipping books (zero-rated) and electronics (standard-rated), both count towards your taxable turnover.
Understanding what’s taxable vs exempt vs zero-rated is key to knowing when you’ll need to register and what you can and can’t charge VAT on.
Does Every Business Have to Be VAT Registered?
No, not all businesses need to register for VAT.
If your taxable turnover is below the threshold and you’re not voluntarily registered, you don’t need to charge or collect VAT. This applies whether you’re a sole trader or a limited company. VAT registration is based on turnover, not your legal structure.
But the moment your turnover tips over the £90,000 mark (or you expect it to in the next 30 days alone), registration becomes mandatory and you’ll need to notify HMRC promptly to stay compliant.
Paying and Charging VAT
When Does a Business Pay VAT?
Once you’re VAT registered, you’ll usually submit a VAT return every quarter. This is where you report how much VAT you’ve charged customers and how much you’ve paid on your business expenses.
The difference between those two amounts is what you pay to HMRC (or reclaim if you’re due a refund).
Returns and payments are generally due one calendar month and seven days after the end of each VAT quarter. So if your quarter ends on 31 March, your return and payment would be due by 7 May.
You can account for VAT using two methods:
- Accrual accounting (standard): VAT is recorded on the invoice date, regardless of when you get paid.
- Cash basis accounting: VAT is only recorded when you actually receive or make payment. This is helpful for managing cash flow.
You can pay your VAT via direct debit, bank transfer, or through HMRC’s online payment system.
Charging VAT to Customers
When you’re VAT registered, you need to charge VAT on all taxable sales and make sure your invoices reflect this clearly.
There are three main VAT rates:
- 20% standard rate – most goods and services.
- 5% reduced rate – some energy-saving products, children’s car seats, and certain renovations.
- 0% rate – books, children’s clothes, and most food (not including hot or restaurant meals).
Even if an item is zero-rated, it still needs to be reported on your VAT return.
Your invoices must include your VAT number, the rate charged, and show whether the price includes or excludes VAT. Being clear on this is essential, not just for your customers, but for your own records and compliance.
Can You Reclaim VAT on Business Expenses?
Yes. Most VAT-registered businesses can reclaim VAT on goods and services purchased for business use. This includes things like tools, stock, professional services, software subscriptions, and even some mileage costs.
But there are limits. You can’t reclaim VAT on:
- Client entertainment.
- Anything used for personal reasons.
- Purchases without a valid VAT invoice.
To reclaim VAT correctly, you’ll need to keep clear records and as part of Making Tax Digital (MTD), this now means keeping digital copies of invoices and submitting returns using compatible software.
VAT Accounting & Schemes
VAT Returns and Making Tax Digital (MTD)
Once you’re VAT registered, you’ll need to submit regular VAT returns to HMRC, usually every quarter. This return is a summary of how much VAT you’ve charged your customers (output VAT), how much VAT you’ve paid on your business expenses (input VAT), and the difference between the two.
If you’ve charged more than you’ve spent, you’ll owe HMRC the difference. If you’ve spent more, you’ll usually be able to reclaim the excess.
Since April 2022, Making Tax Digital (MTD) is now compulsory for all VAT-registered businesses. This means you must:
- Keep your VAT records digitally – no more handwritten ledgers or spreadsheets without digital links.
- Use MTD-compliant software to submit your VAT returns.
- Keep records of your VAT calculations, sales, and purchases in an approved digital format.
Most businesses use accounting software like Xero, QuickBooks, or Sage to stay compliant. MTD isn’t just a compliance requirement, it can also make your life easier, with less admin, fewer mistakes, and more visibility over your VAT position.
Which VAT Scheme Is Right for You?
When you register for VAT, you’ll be on the Standard VAT Accounting Scheme by default. This means you charge VAT on your invoices, reclaim it on eligible purchases, and file quarterly returns based on invoice dates, regardless of when you actually get paid.
But depending on your business’s size and cash flow, there might be a better fit. Here are some alternatives worth considering:
Flat Rate VAT Scheme
Designed for small businesses with annual VATable turnover of £150,000 or less (excluding VAT), this scheme lets you pay a fixed percentage of your total turnover to HMRC, instead of tracking all input VAT.
It’s simpler to manage, and in some cases, it can reduce your VAT bill. But you can’t reclaim VAT on most purchases, so it’s not always the most cost-effective option if you buy a lot of stock or equipment.
Cash Accounting Scheme
With this scheme, you only account for VAT when money changes hands. So you don’t pay VAT until your customers have actually paid you which is great for managing cash flow if you have long payment terms or deal with late payers.
It also means you can’t reclaim VAT on purchases until you’ve paid the supplier, so it’s a bit of a trade-off.
Annual Accounting Scheme
Instead of filing quarterly, you submit one VAT return per year and make advance payments towards your VAT bill throughout the year.
It’s handy for budgeting and simplifies your admin, but it’s only open to businesses with turnover under £1.35 million.
Not sure which scheme makes the most sense for your setup? Our team of experts can help you weigh up the pros and cons and make sure you’re on the most tax-efficient option.
Common VAT Mistakes to Avoid
VAT Registration Oversights
One of the most common mistakes small businesses make is missing the VAT registration threshold. HMRC doesn’t automatically tell you when you need to register, it’s your responsibility to track your taxable turnover and act when you go over the £90,000 limit.
On the flip side, if your turnover drops below the deregistration threshold (currently £88,000), you may be eligible to deregister. Some businesses stay VAT-registered longer than they need to, adding unnecessary admin or cost.
Keeping an eye on your turnover and checking the rules regularly can help you stay compliant and avoid late registration penalties.
Incorrect VAT Claims
It can be tempting to reclaim VAT on everything you spend money on but HMRC has strict rules on what qualifies as a legitimate business expense.
Claiming VAT on personal purchases, entertaining clients, or items used outside the business is a fast track to penalties. If in doubt, check the rules or ask your accountant before hitting submit.
Motor vehicles
There are complex rules around motor vehicle VAT reclaims and the rules differ depending on whether it is deemed to fall under the definition of a car for VAT purposes. The rules also differ if you are buying or leasing a vehicle for use in your business.
Please check with your accountant prior to signing the final deal so you know the cashflow impact of a vehicle lease or purchase.
Poor Recordkeeping
VAT compliance relies heavily on your records. If you’re ever inspected by HMRC, they’ll expect to see accurate, digital records of your sales, purchases, and VAT calculations, complete with valid VAT invoices.
Missing paperwork, vague receipts, or sloppy digital records can lead to delays, interest charges, or even fines. Keeping on top of your books (and using proper software) isn’t just good practice, it’s essential for avoiding unnecessary stress later on.
VAT for Businesses FAQs
Do Businesses Pay VAT on Profit or Turnover?
VAT is calculated based on your taxable turnover, not your profit. That means it applies to the total value of your VATable sales, regardless of your expenses or how much profit you actually make. Profit is relevant for income or Corporation Tax, but VAT is purely based on the value of goods or services sold.
What Is the VAT Threshold in 2025/26?
As of the 2025/26 tax year, the VAT registration threshold is £90,000 in taxable turnover over a rolling 12-month period. This means if your VATable sales go over that figure at any point, you’ll need to register within 30 days.
Does My Business Need to Register for VAT?
You must register for VAT if your taxable turnover exceeds £90,000 in any 12-month period. Even if you haven’t hit that threshold yet, you might still choose to register voluntarily, for example, if most of your customers are VAT-registered and can reclaim it.
Can I Be VAT Registered If I’m Below the Threshold?
Yes. Voluntary VAT registration is allowed, and in some cases, it can work in your favour. If your business makes a lot of purchases where you pay VAT (e.g. stock, equipment, materials), registering early can help you reclaim that VAT, even if you’re not required to register yet.
How Often Do I Need to Submit VAT Returns?
Most businesses submit a VAT return every quarter, though if you’re on the Annual Accounting Scheme, you’ll only file once a year (with advance payments throughout). Returns must be submitted using MTD-compliant software, and the usual deadline is one month and seven days after the end of your VAT period.
Can I Charge VAT If I’m Not Registered?
No. It’s illegal to charge VAT on your invoices if you’re not VAT registered. You can’t just add 20% and keep it. If you’ve done this in error, you’ll need to repay the VAT to HMRC and correct your invoicing.
How Do I Pay VAT to HMRC?
You’ll pay any VAT owed after submitting your return. Payments can be made via bank transfer, Direct Debit, debit/credit card, or through your online HMRC business account. Be sure to pay on time as missed deadlines can result in interest and penalties.
Can I Claim Back VAT on Start-Up Costs?
Yes, in many cases, you can reclaim VAT on start-up costs, including equipment, stock, and some services purchased before you registered for VAT. HMRC allows you to claim VAT on goods bought up to four years prior and services up to six months, as long as they’re still used in the business and meet eligibility criteria.
Do You Pay VAT on All Turnover?
Not necessarily. VAT only applies to your VATable turnover, which includes standard, reduced, and zero-rated goods and services. Some income (like exempt supplies or outside-the-scope revenue) doesn’t count. That’s why it’s important to understand what qualifies and keep clear records.
How Ryans Can Help With VAT
VAT can be one of the most confusing areas of business tax and it’s not always obvious what you can reclaim, which scheme to choose, or when to register. That’s where we come in.
At Ryans, we offer:
- Tailored support with VAT registration, helping you get set up correctly from day one.
- VAT return preparation and submission, using MTD-compliant systems to keep you HMRC-ready and maximising your claims.
Advice on choosing the right VAT scheme for your turnover, industry, and cash flow. - Ongoing compliance and audit support, so you stay on the right side of the rules and avoid nasty surprises.
Get in touch today to speak to a VAT expert and make sense of your obligations.