What is VAT and who needs to register?

Value Added Tax (VAT) is a tax added to the price of most goods and services sold in the UK. Businesses registered for VAT charge it on their sales (output VAT), and can generally reclaim the VAT they pay on their own business purchases (input VAT), paying HMRC only the difference. For a new small business, one of the earliest and most important decisions is when — or whether — to register.

The registration threshold

VAT registration becomes compulsory once your VAT-taxable turnover exceeds £90,000 within any rolling 12-month period — not just your accounting year, but any 12 consecutive months looked at on a rolling basis. You must also register if you expect your turnover to exceed £90,000 in the next 30 days alone. It's the business owner's responsibility to monitor turnover and register on time; missing the deadline can lead to penalties and having to account for VAT retrospectively.

How VAT works day to day

Once registered, you must charge VAT (usually at the standard rate of 20%, though reduced and zero rates apply to some goods and services) on your taxable sales, issue VAT invoices, and keep digital VAT records. At the end of each VAT period (usually quarterly), you submit a VAT return showing the VAT you charged customers and the VAT you paid on business expenses, paying HMRC the net amount, or in some cases reclaiming a refund if input VAT exceeds output VAT.

A simple example

If a VAT-registered consultant charges a client £1,000 plus VAT (£1,200 total) and has paid £240 (including £40 VAT) on software subscriptions that quarter, they would pay HMRC £200 (£240 output VAT collected, minus £40 input VAT reclaimed).

The Flat Rate Scheme

Many small businesses with straightforward operations use the Flat Rate Scheme as a simpler alternative to standard VAT accounting. Instead of tracking input VAT on every purchase, you pay HMRC a fixed percentage of your VAT-inclusive turnover, with the percentage depending on your trade sector. This can reduce the administrative burden considerably, though it isn't always the most financially advantageous option — businesses with high VATable expenses (for example, ones that buy a lot of stock or equipment) often do better under standard VAT accounting, where they can reclaim input VAT in full.

Making Tax Digital and quarterly returns

VAT-registered businesses are required to keep digital records and submit VAT returns using compatible software under Making Tax Digital (MTD) rules, rather than filing manually through HMRC's website. Most businesses submit returns quarterly, though monthly or annual accounting schemes are available in some circumstances. Choosing accounting software that is MTD-compliant from the outset saves a lot of hassle later.

Should you register voluntarily below the threshold?

You can choose to register for VAT even if your turnover is well below £90,000. This can make sense if:

  • Most of your customers are VAT-registered businesses themselves, who can reclaim the VAT you charge them, meaning registration costs you little in practice while letting you reclaim VAT on your own costs.
  • You have significant upfront costs (equipment, stock, professional fees) on which you'd like to reclaim VAT.
  • You want to project a more established, "VAT-registered" image to clients or suppliers.

On the other hand, voluntary registration adds an ongoing compliance burden, and if your customers are mainly individual consumers who can't reclaim VAT, charging it can make your prices less competitive. It's worth weighing this decision carefully, ideally with an accountant, based on your customer base and cost structure.

Key takeaways

  • VAT registration is compulsory once taxable turnover exceeds £90,000 in any rolling 12-month period, or is expected to in the next 30 days.
  • Registered businesses charge VAT on sales and can reclaim VAT on eligible business purchases, paying HMRC the net difference.
  • The Flat Rate Scheme simplifies VAT accounting for many small businesses but isn't always the cheapest option.
  • Making Tax Digital requires digital record-keeping and compatible software for VAT returns.
  • Voluntary registration below the threshold can suit businesses selling mainly to other VAT-registered businesses, but may disadvantage those selling to consumers.