How does VAT work for small businesses UK | Figures Chartered Accountants

VAT can feel like a maze. When do you need to register? What rate do you charge? How do you report it? For small businesses in the UK, getting VAT wrong can mean unnecessary cost, admin headaches, or trouble with HMRC. This article explains how VAT works for small businesses in the UK in plain terms: registration, rates, returns, and the main schemes you might use.

We cover the basics of VAT, when you must register, and what happens once you are in the system. This is for sole traders and limited company owners who are new to VAT or want a clear refresher.

What is VAT and how does it work?

VAT (Value Added Tax) is a tax on the value added at each stage of supplying goods or services. In practice, you charge VAT on your sales (output tax) and reclaim VAT on your business purchases (input tax). You pay HMRC the difference, or claim a refund if your input tax exceeds your output tax. The standard rate in the UK is 20%. Some goods and services are reduced (5%) or zero-rated (0%); others are exempt (no VAT charged, and generally no reclaim on costs).

Why it matters for small businesses

If you are not registered, you cannot charge VAT and you cannot reclaim it. Once you are over the threshold (or choose to register), you must charge VAT where applicable, keep records, and submit returns. Getting it right keeps you compliant and can improve cash flow if you reclaim more than you pay. For more on VAT and returns, see our Statutory Accounts & Tax service.

When do you have to register for VAT?

You must register for VAT if your taxable turnover in the last 12 months has gone over the threshold (currently £90,000 for 2024/25 and 2025/26), or you expect it to in the next 30 days. "Taxable" means supplies that are not exempt. You can register voluntarily below the threshold if you want to reclaim input tax (e.g. you have high upfront costs). HMRC guidance on VAT registration has the full rules and thresholds.

What counts as turnover

Turnover is the value of your taxable supplies, not profit. If you are close to the threshold, monitor your rolling 12-month total. Crossing it triggers a requirement to register from a set date; missing that date can mean penalties.

The main VAT schemes for small businesses

Standard scheme

You report output VAT and input VAT on each return (usually quarterly). You pay or reclaim the difference. This is the default and suits many businesses.

Flat rate scheme

You pay a fixed percentage of your turnover (including VAT) to HMRC. You do not reclaim input VAT (except on certain capital purchases). The percentage depends on your trade. It can simplify admin and sometimes reduce the net VAT cost for businesses with few reclaimable inputs.

Cash accounting scheme

You account for VAT when you are paid and when you pay your suppliers, not when you invoice or receive an invoice. That can help cash flow if your customers pay late. There are eligibility conditions; see GOV.UK VAT schemes.

Returns and deadlines

Most businesses submit a VAT return quarterly. The return and any payment are due one month and seven days after the end of the period. You must keep digital records and submit via compatible software (Making Tax Digital for VAT). Missing the deadline can lead to penalties and interest.

UK tax and legal accuracy

VAT is governed by the Value Added Tax Act 1994 and HMRC guidance. Thresholds and rates can change. The information here reflects the position for 2024/25 and 2025/26. This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action.

Frequently asked questions

Do I charge VAT on everything I sell?

No. Only on taxable supplies at the relevant rate (standard, reduced, or zero). Exempt supplies (e.g. some financial or insurance services) are not taxable. Some sales are outside the scope of UK VAT (e.g. certain exports).

What if I am under the threshold?

You do not have to register. You can register voluntarily if it helps (e.g. to reclaim input tax). Once registered, you usually stay in the system.

Can I reclaim VAT on a car?

Generally not for a car available for private use. There are exceptions (e.g. cars used exclusively for business, or for certain trades like driving instruction). Your accountant can advise.

How do I cancel my VAT registration?

If your turnover falls below the threshold and you expect it to stay there, you can apply to HMRC to cancel. You will need to submit a final return and may have to account for VAT on stock and assets.

What is the VAT flat rate percentage for my business?

HMRC publish a list of sectors and their flat rate percentages. The percentage depends on your trade. Some businesses (with limited costs) benefit; others are better on the standard scheme.

Summary and next steps

How VAT works for small businesses in the UK: you charge VAT on taxable sales, reclaim it on qualifying costs, and pay or reclaim the difference on your return. Register when you exceed the threshold (or voluntarily), choose a scheme that fits (standard, flat rate, or cash accounting), and keep digital records. Getting it right from the start saves time and avoids problems.

If you would like help with VAT registration, returns, or choosing a scheme, we would be glad to help. At Figures Chartered Accountants we work with UK small businesses on VAT and tax. You can book a discovery call or look at our Statutory Accounts & Tax service.