A small business guide to value-added tax (VAT), including the current threshold and rates, and when you may need to register.
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Registering for VAT is a crucial part of getting your small business accounting software in order. If your taxable turnover exceeds £90,000, you’ll need to become VAT-registered.
With this threshold remaining frozen until at least March 2026, small businesses are being caught by “threshold drift”, where rising prices and turnover are pushing them over the limit, even though their actual growth or profitability hasn’t changed.
Regardless, you must register for VAT if your taxable turnover exceeds the threshold in the next 12 months, or you expect it to go over this amount in the next 30 days. You can also register voluntarily, so that you can reclaim VAT incurred on goods and services.
Below, we’ll guide you through everything you need to know about when to register for VAT, including the current VAT threshold, the different VAT rates, and how to choose the right VAT scheme for your business.
- VAT (value-added tax) is a tax that’s charged on most goods and services sold by businesses.
- You must register for VAT if your taxable turnover exceeds £90,000 in the next 12 months.
- You must also register if you expect your taxable turnover to exceed the threshold in the next 30 days.
- You can register for VAT voluntarily, which allows you to reclaim VAT on most goods and services charged.
- The three main VAT schemes you can apply for are the flat rate scheme, cash accounting scheme, and annual accounting scheme.
In this guide
The 2025 Autumn Budget confirmed that the threshold will remain at £90,000 from April 2026.
It was also confirmed that a new VAT relief for business donations of goods to charity will start on 1 April 2026. The relief will cover items worth up to £100 each, increasing to £200 each for essential electrical goods like laptops and household appliances to help address digital poverty.
Making Tax Digital (MTD) is an initiative from the UK Government to modernise the tax system, moving it away from manual paperwork and into a fully digital setup.
Under MTD, businesses must keep digital records and submit tax information to HMRC using compatible accounting software, helping to cut down on errors and make compliance simpler.
Check out our full guide to MTD to see what it means for your business and how to get your business ready.
What is VAT?
VAT — short for value-added tax — is a tax that’s added to most products and services offered by VAT-registered businesses. For consumers, it’s a tax added to the price of the things they buy.
How it works is simple. First, a business buys raw materials, and will pay VAT on that purchase. Next, when they sell the goods or services, they’ll add the VAT as an extra charge on top of the original price. From there, they’ll pay the Government the difference between the VAT collected from customers and the VAT they paid on business expenses.
In the UK, businesses must be VAT-registered when they’re taxable turnover exceeds the threshold. If you need help, read our guide on how to register for VAT to get the essential information you need.
As of April 2022, all VAT-registered businesses in the UK must comply with Making Tax Digital (MTD).
This means keeping digital records of sales and purchases with MTD-compatible software, and submitting VAT returns directly through that software. Spreadsheets are still allowed, but only if they’re digitally connected to the approved software.
If HMRC finds your digital records don’t meet MTD requirements, your VAT returns may be rejected, which can trigger late submission penalties in turn.
What is the threshold for compulsory VAT registration?
The current VAT registration threshold is£90,000, and this has remained unchanged following the 2025 Autumn Budget update.
A business must register for VAT if its taxable turnover is more than the VAT threshold for any consecutive 12-month period. You must also register if you expect your turnover to exceed this amount in the next 30 days.
Another common reason why businesses may have to register is if they take over an existing VAT-registered business. If the taxable turnover of the purchaser for the last 12 months, plus the turnover of the business being purchased, is over the threshold, then the purchasing business must register.
Outside of this, there are a few other scenarios when VAT registration becomes necessary. For instance, if you’re trading outside of the UK.
What happens if I don’t register on time?
If you don’t register for VAT on time, you might have to pay a late registration penalty and/or a “failure to notify” penalty.
What’s more, surcharges and interest are likely to be charged for late payment if the business has a VAT liability. If your business’s turnover exceeds the VAT threshold temporarily, you can ask HMRC for an exception from registration.
A company cannot register for VAT if it does not meet the definition of a business as stated by HMRC for VAT purposes.
Additionally, a business would also be prohibited from registering if it tends to sell only goods or services that are exempt from VAT.
Can you voluntarily register for VAT?
If the taxable turnover of your business does not exceed the current VAT registration threshold, you can still register for VAT voluntarily.
The common reasons why a business might opt to register for VAT include:
- VAT can be reclaimed on most goods and services that the business purchases.
- If a company’s customers are mainly VAT-registered businesses, they can also reclaim any VAT that is charged.
- It gives small businesses the appearance of being more established, which can be appealing to customers, lenders, investors, and suppliers.
- It pushes small businesses to keep more accurate records, which can help keep things running smoothly.
B2B vs B2C: why does it matter for VAT?
Unless it is mandatory, businesses should think about their customers before choosing to register for VAT.
For B2B businesses, it won’t have a major effect on clients. As mentioned earlier, if a company’s customers are generally other VAT-registered businesses, they won’t mind if they’re charged VAT, because they can reclaim it from HMRC later on.
On the other hand, B2C businesses will have to charge VAT on products/services to the general public, who aren’t VAT-registered. This means that the VAT would be an additional cost and would inflate the retail price. Also, if the business’s competitors aren’t VAT-registered, customers may be more drawn to their prices instead.
What are the different VAT rates?
The most common VAT rate in the UK is 20%. However, certain goods and services are marked lower, or even exempt from VAT completely. Here’s a quick overview of the different categories:
| Name | Current rate | Examples |
|---|---|---|
| Standard | 20% | The majority of goods and services sold in the UK, such as clothing, electronics, and fuel. |
| Reduced | 5% | Covers a large number of products/services, including children’s car seats, specific medication for disabled people, certain social housing projects, and LPG and heating oil used in households. |
| Zero | 0% | Zero VAT rates for domestic and international passenger transport, newspapers and magazines, basic unprocessed food, water supplies, animal feed, and more. |
| Exempt | N/a | Some products and services are exempt from VAT completely, including entrance fees to cultural events (e.g. museums, art exhibitions and zoos), care provided by a qualified institution (e.g. hospital or care home), health services provided by registered professional, and education provided by an authorised body. Business donations to charity will also be exempt from April 2026. |
| Outside the scope | N/a | Items that are completely outside of the UK VAT system. Examples include drawings, wages, MOT tests, rates, etc. |
Choosing a VAT scheme
Once you’ve established when to register for VAT, you’ll want to consider the most appropriate VAT scheme for your business. There are three main options:
VAT flat rate scheme
This scheme is only eligible for businesses with less than £150,000 of taxable turnover. It is designed to make record keeping simpler for small businesses by allowing you to apply a fixed-rate percentage to turnover, dependent on industry.
For more detailed information from HMRC, click here.
VAT cash accounting scheme
Another popular choice for startups and small businesses, but it is only accessible for those with a turnover of less than £1.35m. In this scheme, you only have to pay VAT on your sales once you have received payment from your customers. Likewise, you only reclaim VAT on any purchases you make once you have paid your supplier.
However, you still have to pay HMRC, even if the invoices haven’t been paid yet, which can risk cashflow issues. You also cannot use the cash accounting scheme in conjunction with the VAT flat rate scheme.
Annual accounting scheme
Rather than filing your return each quarter, this scheme allows businesses to submit one annual return, as well as making advance payments (using estimated amounts based on the previous year’s return) throughout the year.
Once you’ve completed your return, you can either make a final payment (to cover any shortfall between your advance payments and the final bill) or apply for a VAT refund if you’ve overpaid.
For retail businesses, there are several VAT schemes you can apply for. These include:
- Point of Sale Scheme: you identify and record the VAT at the time of sale.
- Apportionment Scheme: you can only use this scheme if you buy goods for resale and have a turnover (excluding VAT) of £1m or less. You cannot use this scheme if you’re selling services or goods you’ve made yourself.
- Direct Calculation Scheme: you make a small proportion of sales at one VAT rate (e.g. 20%) and the majority at another rate. Only available if you have a turnover (excluding VAT) of £1m or less.
- VAT Margin Scheme: you pay VAT on the value you add to the goods you sell rather than on the full selling price of each item. Only available if you sell secondhand goods, works of art, antiques, or collectors’ items.
Conclusion
You must register for VAT if your taxable turnover exceeds £90,000 in the next 12 months, or you expect that it’ll hit this amount in the next 30 days.
But even when it’s not mandatory, registering for VAT can have its perks. You can reclaim it on most goods and services, and even come across as more established, attracting customers, investors, or lenders.
Either way, a good accounting software can be a lifesaver when managing VAT. Not only can it save serious admin time by automating VAT calculations and correcting VAT rates, but it can also ensure you remain compliant with the UK’s MTD regulations.
Need help finding the right software? Check out our guide on the best accounting software for small businesses for our top choices, including features, pricing, and who it’s best suited for.
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