What is VAT?

VAT stands for Value Added Tax. It’s a tax added to the price of most goods and services in the UK. The standard rate is 20%, so when you buy something for £120, around £20 of that is usually VAT going to the government.

The key thing to understand: businesses don’t really “pay” VAT — they collect it. A VAT-registered business adds VAT to its prices, collects it from customers, and passes it on to HMRC. In the end, it’s the final customer who actually bears the cost. The business is just acting as a tax collector in the middle.

How VAT actually works

Once you’re VAT registered, there are two sides to keep track of:

• Output VAT — the VAT you add to your sales and collect from your customers.
• Input VAT — the VAT you pay on your own business purchases (like stock, equipment, or supplies).

Each VAT period, you work out the difference. You pay HMRC the output VAT you collected, minus the input VAT you paid. If you collected more than you paid, you pay HMRC the difference. If you paid more than you collected, HMRC refunds you.

A simple example: You charge customers £2,000 of VAT on your sales (output VAT) and you paid £500 of VAT on your supplies (input VAT). You hand HMRC the difference — £1,500.

The different VAT rates

Not everything is taxed at the same rate. There are three VAT rates, plus some things that are exempt entirely:

• Standard rate (20%) — applies to most goods and services.
• Reduced rate (5%) — applies to some things like home energy and children’s car seats.
• Zero rate (0%) — applies to items such as most food and children’s clothing. These are still “taxable” at 0%, so they count towards your turnover.
• Exempt — things like insurance, some financial services, and certain education. These are outside VAT altogether and don’t count towards the registration threshold.

The difference between “zero-rated” and “exempt” matters: zero-rated sales count towards whether you need to register, but exempt ones don’t. Always check the current rates on GOV.UK, as they can change.

When do you have to register?

This is the question most business owners care about. You must register for VAT once your taxable turnover crosses the threshold.

The VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period. (Unchanged since April 2024.)

“Taxable turnover” means your total sales that aren’t VAT-exempt — including standard, reduced and zero-rated sales. It’s your turnover (sales), not your profit. HMRC uses two separate tests, and you must register the moment either one is met:

1. The backward-look (historical) test

At the end of every month, look back at your taxable turnover for the previous 12 months. If it has gone over £90,000, you must tell HMRC within 30 days of the end of that month. Your registration then takes effect from the first day of the second month after you crossed the threshold.

2. The forward-look (future) test

If at any point you have good reason to believe your taxable turnover will go over £90,000 in the next 30 days alone — for example, you’ve just signed a big contract — you must register straight away. This test catches you even if your past turnover is well below the threshold.

Don’t miss the deadline. If you register late, HMRC can backdate your registration and make you pay the VAT you should have charged — even if you never collected it from customers — plus penalties.

What about registering voluntarily?

You can choose to register for VAT even if you’re below £90,000. It’s not always worth it, but it can make sense if:

• You buy a lot of VATable supplies — you can reclaim the VAT on your business purchases.
• Your customers are mostly other VAT-registered businesses — they can reclaim the VAT you charge, so it doesn’t really cost them, and being registered can look more established.

The downside: if you sell mainly to ordinary consumers, adding 20% can make you more expensive (or eat into your margin), and you take on the admin of returns and record-keeping. It’s worth weighing up — an accountant can help you model it.

How to register

Registering is free and usually done online through your HMRC business tax account. The form itself takes about 10–15 minutes if you have your details ready.

Step 1 — Check you actually need to (or want to) register.

Run a rolling 12-month total of your taxable turnover and check it against the £90,000 threshold, or decide whether voluntary registration suits you.

Step 2 — Gather your details.

You’ll typically need your Unique Taxpayer Reference (UTR), business and contact details, turnover figures, business bank account details, and (for limited companies) your company registration number.

Step 3 — Sign in to your Government Gateway account.

Use your business tax account and select “Register for VAT.” If you don’t have a Government Gateway ID, you can create one during the process.

Step 4 — Complete the application.

Enter your business details and expected turnover, and choose a VAT scheme if relevant (see below).

Step 5 — Submit and wait for your VAT number.

HMRC processes most applications within a few weeks (it can take longer if they need extra checks). You’ll get a VAT registration certificate showing your VAT number, your effective registration date, and your first return deadline.

What happens after you register?

Once registered, your day-to-day changes in a few ways:

• You charge VAT on your sales from your effective registration date, and show it separately on your invoices.
• You add your VAT number to your invoices and paperwork.
• You can reclaim VAT on your eligible business purchases.
• You submit VAT returns to HMRC (usually every three months) and pay any VAT due.

VAT returns are normally due, and payment must reach HMRC, one calendar month and seven days after the end of each VAT period. Late returns and payments trigger automatic penalties, so it pays to set reminders or use software that prompts you.

Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT now applies to all VAT-registered businesses. From your very first return, you must:

• Keep your VAT records digitally.
• Use MTD-compatible software to submit your returns.

You can still use spreadsheets, but they have to be linked to compatible “bridging” software — you can’t just type figures into the HMRC website any more. (This is separate from MTD for Income Tax, which applies to sole traders and landlords.)

VAT schemes that can make life easier

HMRC offers optional schemes that can simplify accounting or help cash flow. The main ones are:

• Flat Rate Scheme — you pay a fixed percentage of your turnover instead of working out every transaction. Simpler, but not always cheaper.
• Cash Accounting Scheme — you account for VAT when money actually changes hands, rather than when invoices are raised. Good for cash flow.
• Annual Accounting Scheme — you make advance payments through the year and submit one annual return.

Each has eligibility rules and trade-offs, so it’s worth getting advice before choosing one.

Records and deregistering

Keep your records. VAT-registered businesses must keep VAT records and accounts — normally for at least six years.

Coming back below the threshold. If your taxable turnover falls below the deregistration threshold of £88,000 and you expect it to stay there, you can apply to deregister and stop charging VAT.

Quick FAQ

Is the threshold based on profit or turnover?

Turnover (your total taxable sales), not profit. This catches a lot of people out.

Do I get a separate £90,000 allowance for each business I run?

No. If you’re a sole trader, the threshold applies to you as an individual across all your trades combined.

Does it cost anything to register?

No. HMRC doesn’t charge a fee to register for VAT. Your costs are things like MTD software and any accountant’s fees.

What if I only go over the threshold once, by a one-off?

If you can show the breach is temporary and your turnover will stay below the deregistration threshold (£88,000), you can apply to HMRC for an exception from registration.

How long does registration take?

The form takes 10–15 minutes. HMRC usually issues your VAT number within a few weeks, though it can take longer if extra checks are needed.

Do non-UK businesses have to register?

Often yes — and frequently from their first UK sale, with no threshold. The rules for overseas sellers (for example, storing stock in UK warehouses) are different and worth specialist advice.

Official sources

This guide is based on official UK government information. Always check GOV.UK and HMRC for the latest thresholds, rates and rules, as these can change:

• UK — How VAT works
• UK — VAT registration: who must register and how
• UK — VAT rates on different goods and services
• UK — VAT thresholds
• UK — Making Tax Digital for VAT
• HMRC — VAT Notice 700 and VAT Notice 700/1

This article is for general information only and is not a substitute for professional tax or accounting advice. VAT can be complex — if your situation is unusual, consider speaking to an accountant.