The basics
VAT (Value Added Tax) is a tax charged on most goods and services sold in the UK. If you're VAT registered, you charge VAT on your sales (output VAT), reclaim VAT on your business purchases (input VAT), and pay HMRC the difference — or claim a refund if you've paid out more than you've charged.
When you have to register
Registration is compulsory once your taxable turnover (not profit — total sales, excluding VAT-exempt items) exceeds £90,000 in any rolling 12-month period, not just your accounting year. You must register within 30 days of the end of the month you crossed the threshold in, and VAT becomes due from the first day of the second month after that. Miss the deadline and HMRC can charge a penalty on top of backdating the VAT you should have charged. If your turnover later falls, you can apply to deregister once it drops below £88,000.
You can also register voluntarily below the threshold — worth considering if most of your customers are VAT-registered businesses themselves (so the VAT you charge doesn't put them off) and you have significant VAT-bearing costs you'd like to start reclaiming.
Choosing a VAT scheme
- Standard VAT accounting — you account for VAT based on invoice dates, reclaiming and charging VAT as transactions occur.
- Flat Rate Scheme — instead of tracking VAT on every purchase, you pay a fixed percentage of your VAT-inclusive turnover, with the percentage set by your trade sector. Can simplify admin and occasionally save money for businesses with low VATable costs, but you generally can't reclaim VAT on individual purchases (with limited exceptions for larger capital items).
- Cash Accounting Scheme — you account for VAT when you're actually paid or actually pay, rather than on invoice date. Useful for managing cash flow if your customers are slow payers.
- Annual Accounting Scheme — one VAT return a year instead of quarterly, with payments on account throughout the year. Can simplify admin for smaller, stable businesses.
The right scheme depends on your margins, your customers, and how VAT-heavy your costs are — it's worth reviewing periodically, not just picking one at registration and never revisiting it.
Making Tax Digital for VAT
Unlike MTD for Income Tax (which is only now being phased in), MTD for VAT has been mandatory for all VAT-registered businesses since 2022, regardless of turnover. That means digital record-keeping and submitting VAT returns through MTD-compatible software — no more manually typing figures into HMRC's old online portal.
Common mistakes we see
- Missing the 30-day registration deadline after crossing the threshold, often because turnover is only checked at year-end rather than on a rolling basis.
- Reclaiming VAT on ineligible costs — client entertainment is a classic one; it's not reclaimable, unlike staff entertainment within certain limits.
- Getting overseas and EU sales wrong — the VAT treatment of goods and services sold to customers outside the UK has its own rules, and it's an easy area to get wrong without checking.
- Not accounting for VAT on cash-based businesses properly when there's a mix of standard, zero-rated and exempt sales in the same business.
- Sticking with the wrong scheme long after it stopped suiting the business, simply out of inertia.
Getting it right from day one
VAT is one of the areas where a small early mistake compounds quietly for years before it surfaces — often at the worst possible time, like a VAT inspection or a business sale. If you're approaching the threshold, already registered and unsure you're on the right scheme, or just want a second opinion on how you're currently handling it, that's exactly what our VAT reviews are for.