What is VAT?
VAT, Value Added Tax, is a tax on the sale of goods and services. If your business is VAT-registered, you charge VAT on top of your prices, collect it from your customers, and pay it over to HMRC, usually every quarter. In return, you can reclaim the VAT you've paid on business purchases and expenses.
The standard rate of VAT in the UK is 20%. Some goods and services are subject to a reduced rate of 5% (such as domestic fuel and children's car seats), and others are zero-rated (such as most food, children's clothing, and books) or exempt altogether.
When must you register for VAT?
VAT registration becomes compulsory when your taxable turnover exceeds the VAT registration threshold. As of 2026/27, this threshold is £90,000 in any rolling 12-month period.
It's important to understand that this is a rolling 12-month figure, not your annual accounts year. You must monitor your turnover continuously. If you exceed the threshold at any point during a 12-month period, you must register within 30 days of the end of the month in which you crossed it.
Key point: Failing to register on time means HMRC can charge VAT on all your sales from the date you should have registered, even if you didn't charge it to your customers. This can result in a significant unexpected bill.
What counts as taxable turnover?
Not all income counts towards the VAT threshold. Taxable turnover includes the value of all standard-rated, reduced-rated, and zero-rated sales. It does not include:
- VAT-exempt sales (such as financial services, insurance, or private education)
- Sales of capital assets used in your business
- Income that is outside the scope of VAT entirely
If you are unsure what counts as taxable turnover in your business, it's worth getting advice, especially if you operate in a sector with a mix of exempt and taxable supplies.
Can you register voluntarily?
Yes. Any business can register for VAT voluntarily, even if its turnover is below the £90,000 threshold. Whether this is beneficial depends on your specific circumstances.
When voluntary registration makes sense
- Your customers are VAT-registered businesses. If your clients can reclaim the VAT you charge them, the 20% addition to your prices costs them nothing. Meanwhile, you can reclaim VAT on all your business purchases, which can be a significant saving if you have substantial costs.
- You have significant input VAT. If you spend heavily on VAT-rated goods or services (equipment, materials, professional fees), registration allows you to reclaim those costs.
- You want to appear larger or more established. Some businesses register voluntarily because being VAT-registered can signal to clients that you are a substantive business.
When voluntary registration may not be beneficial
- Your customers are private individuals. Consumers cannot reclaim VAT, so registering adds 20% to your prices, which can make you less competitive unless you absorb the cost yourself.
- You have low business costs. If you have few VAT-ratable expenses to reclaim, the administrative burden of VAT returns may not be worthwhile.
The different VAT schemes
Once registered, you don't have to use the standard VAT accounting method. HMRC offers several alternative schemes that can simplify administration or improve cash flow:
Flat Rate Scheme
Instead of calculating VAT on every sale and purchase, you pay a fixed percentage of your gross turnover to HMRC. The percentage varies by industry (for example, 14.5% for accountants, 9% for retailers). This scheme can be advantageous if your actual VAT on purchases is low, you keep the difference between the flat rate and the standard 20% you charge customers.
Cash Accounting Scheme
Under standard VAT accounting, you account for VAT when you invoice, not when you're paid. The Cash Accounting Scheme lets you account for VAT only when you actually receive payment. This helps cash flow, particularly for businesses that often wait for payment.
Annual Accounting Scheme
Instead of filing four quarterly returns, you file one annual VAT return and make advance payments throughout the year based on your previous year's liability. This reduces admin for smaller, stable businesses.
Making Tax Digital for VAT
All VAT-registered businesses are now required to keep digital VAT records and submit returns through Making Tax Digital (MTD)-compatible software. Paper records and manual submissions to HMRC's online portal are no longer accepted. At Claritax, we manage this on behalf of all our VAT clients using approved software, you don't need to worry about the technical requirements.
How to register
VAT registration is done online through HMRC's Government Gateway. You'll need:
- Your business details (name, address, nature of trade)
- Your National Insurance number (if a sole trader or director)
- Company registration number (if a limited company)
- Details of your bank account
- The date your turnover exceeded (or is expected to exceed) the threshold
As registered HMRC agents, Claritax can handle your VAT registration on your behalf, ensuring it's set up correctly, on the right scheme, from the start.
Not sure if you should register? Book a free consultation and we'll assess your situation and tell you clearly whether registration is compulsory, beneficial, or something to hold off on for now.
Frequently asked questions
What is the VAT registration threshold?
£90,000 in any rolling 12-month period, as of 2026/27. This is a continuous rolling figure, not your annual accounts year, so you need to monitor turnover throughout the year, not just at year-end.
What happens if I register late?
HMRC can charge VAT on all your sales from the date you should have registered, even if you never charged it to customers, which can result in a significant unexpected bill. You must register within 30 days of the end of the month you crossed the threshold.
Should I register for VAT voluntarily?
It depends on your customers and costs. It usually makes sense if your customers are VAT-registered businesses who can reclaim the VAT you charge, or if you have significant VAT on business costs to reclaim. It's usually not worthwhile if you sell mainly to consumers with low business costs.
What's the difference between the VAT schemes?
Standard accounting taxes VAT on invoices issued and received. The Flat Rate Scheme charges a fixed percentage of turnover instead. Cash Accounting only taxes VAT when you're actually paid, helping cash flow. Annual Accounting reduces admin to one return a year with advance payments.
Do I need special software to submit VAT returns?
Yes, Making Tax Digital requires all VAT-registered businesses to keep digital records and submit through MTD-compatible software, paper records and HMRC's old online portal are no longer accepted for most businesses.