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If you're running a small business in the UK, understanding the basics of Value Added Tax (VAT) is essential. This article walks you through what VAT is, when and why you need to register, what a VAT return covers, and practical tips to stay on top of it all.
- What is VAT and how does it work?
What is VAT
VAT is an indirect tax that applies to most goods and services supplied in the UK by businesses that are VAT-registered.
Here's the simplified flow:
- A VAT-registered business charges VAT on its sales (this is called output tax).
- That business also pays VAT on its business purchases (input tax), and usually can reclaim that input tax.
- The difference (output tax minus input tax) is what the business pays to HM Revenue & Customs (HMRC), or claims back if input tax exceeds output tax.
- Ultimately the final consumer bears the cost of the VAT, while
businesses act as collectors.
VAT rates
There are three main VAT rates in the UK:
- Standard rate: 20% (most goods & services)
- Reduced rate: 5% (some goods like domestic fuel & power, children's car seats, etc)
- Zero-rate: 0% (goods still count as taxable supplies but VAT charged is 0, e.g., most food, children's clothes)
Note: Being zero‐rated is different from being exempt or out-of-scope (more on that below).
What VAT is charged on
VAT is charged on supplies of goods or services that are made in the UK by a VAT-registered business in the course of its business.
Examples include hiring out goods, selling goods, providing services, etc. Some supplies are exempt (no VAT charged, and you may not reclaim VAT on purchases) or outside the scope (not part of the VAT system).
Why it matters for small businesses
Even if your clientele are businesses (who reclaim VAT) or consumers (who don't), VAT affects pricing, cashflow and admin. Being VAT-registered signals growth and can affect how you invoice, the records you keep, and when you file returns.
- When you need to register for VAT
Mandatory registration
You must register for VAT if your VAT-taxable turnover (i.e., the total of your taxable supplies, including zero-rated but excluding exempt/out-of-scope supplies) exceeds the current threshold in any rolling 12-month period, or you expect it will exceed it in the next 30 days.
As of 1 November 2025 the threshold is £90,000.
Voluntary registration
You can choose to register voluntarily even if you are below the threshold. This might make sense if, for example:
- You incur a lot of VAT on purchases (so you'd reclaim more input tax than you charge output tax), or
- You sell mostly to VAT-registered businesses (so your extra VAT
charge won't hit the consumer), or
You want the credibility of being VAT registered.
Things to watch out for
- If you sell goods or services that are exempt or outside the scope, those sales may not count towards the VAT threshold - you'll need to check.
- After registration: you must charge VAT at the correct rate, keep appropriate records, submit returns, and pay any VAT owed.
- VAT returns: When, what and how
When you submit
Most VAT-registered businesses submit a VAT return every 3 months (quarterly), though some might do it monthly or annually depending on the scheme.
The deadline for submitting the return and paying any VAT due is usually 1 calendar month + 7 days after the end of the accounting period.
What the return covers
On a VAT return you'll typically report:
- The output VAT you've charged on your sales during the period.
- The input VAT you are reclaiming on your business purchases (where allowable).
- The difference: this is what you owe HMRC (or HMRC owe you, if input is greater than your output).
- You must also include all taxable supplies (including zero-rated) in your taxable turnover figure for registration purposes.
How you file
Since the arrival of the Making Tax Digital for VAT (MTD) initiative, most VAT-registered businesses must keep digital records and submit VAT returns using software that is MTD-compatible.
You'll need to use compatible software or an agent registered with HMRC.
Common boxes and things to check
The official HMRC notice explains box by box how to complete the return.
For instance: Box 1 is VAT due on sales and other outputs; you need to include things like reverse-charge VAT where applicable.
Penalties and late submissions
Late submissions and payments attract penalties. For example, as of January 2023 there is a points-based regime where you earn a penalty point for each late return; when you hit a threshold you face a cash penalty.
- Interesting factors, tips & tricks for small business owners
Here are some practical and engaging pointers to help you stay ahead of VAT rather than chasing it:
- Tip 1: Monitor the threshold - even if you're comfortable
under it.
If you're getting close to the £90k threshold (or you forecast sales growing), start planning ahead: organising records, checking your VAT codes, and perhaps exploring registration or a voluntary option.
- Tip 2: Know your supplies.
Zero-rated items (e.g., children's clothing) still count towards your taxable turnover and so still trigger registration. But exempt supplies (e.g., certain insurance services) generally don't. If your business has a mix of taxable and exempt supplies you may hit "partial exemption" which means you can only reclaim VAT on the proportion of your costs that relate to your taxable sales — not your exempt ones. This can reduce how much input VAT you can recover and make your VAT returns more complex, so it's best to get advice early.
- Tip 3: Choose a VAT scheme that suits you.
- Small businesses may benefit from simplified schemes (e.g., flat-rate scheme) depending on turnover and business type. Discuss with your accountant which scheme gives you the best cashflow and admin simplicity.
- Tip 4: Treat VAT as you would cashflow.
VAT you charge is not "in your pocket" - eventually it belongs (wholly or partly) to HMRC. Make sure your business does not treat VAT monies as operating cash. - Tip 5: Keep digital records and stay MTD-ready.
Even if you think your business is small, the digital records requirement is binding for virtually all VAT-registered businesses. You'll save stress (and possible penalties) by having your systems in place early.
- Tip 6: Reclaim input VAT where you can - but check
eligibility.
Input VAT on business purchases is usually reclaimable - but only if those purchases are used for the business's taxable supplies. If you have exempt supplies, reclaim rules get more complex.
- Tip 7: Don't assume "zero rated = no VAT
admin".
Even if you only supply zero-rated goods (VAT at 0 %), if you are VAT registered you still need to file returns and keep relevant records. You might even be reclaiming input VAT.
- Tip 8: Treat submission deadlines like immovable.
Missing the filing or payment deadline can lead to penalties. Set reminders, check your software submission or agent submission is accepted, and ensure funds for payment are cleared in time.
- Quick checklist for your next VAT return
- Are all sales coded correctly (standard, reduced, zero or exempt) in your bookkeeping system?
- Have you captured all your business purchases that attract reclaimable VAT?
- Is your accounting software set up for MTD and compatible?
- Does your VAT period end soon? Do you know when your submission + payment are due?
- Have you got sufficient funds to pay any VAT owing (if applicable)?
- If you're nearing the threshold, have you forecasted whether you will cross it and prepared accordingly?
- If you are on a special VAT scheme (flat-rate, annual
accounting, cash accounting), is everything entered in line with
the scheme's rules?
- Final thoughts
VAT may seem like one more compliance burden, but in reality, it's a routine part of doing business for many UK enterprises. For a small business, the key is to understand when you must register, make sure your invoicing and record‐keeping are consistent, and stay on top of the return deadlines so VAT doesn't become a surprise.
If your business is growing, seeing fluctuations in the mix of sales (e.g., zero-rated vs standard), or you're exploring a new VAT scheme, it's wise to discuss these with your accountant who can tailor advice to your situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
