What is VAT? A Complete Guide for Small Business Owners (2026)
VAT (Value Added Tax) is a 20% tax on most goods and services in the UK. You must register for VAT once your taxable turnover exceeds £90,000 in any 12-month period. Once registered, you charge VAT on sales, reclaim VAT on business purchases, and pay the difference to HMRC every quarter.
- What is VAT and how does it work?
- When do you have to register for VAT?
- Should you register voluntarily before the threshold?
- How to register for VAT
- How to charge VAT on your invoices
What is VAT and how does it work?#
VAT stands for Value Added Tax. It is a consumption tax that is ultimately paid by the end customer, but collected by businesses on behalf of HMRC. When you are VAT-registered, you add VAT to your invoices, collect it from customers, then pass it to HMRC — minus the VAT you paid on your own business purchases. The standard VAT rate in the UK is 20%. Some goods and services have a reduced rate of 5% (such as home energy) or are zero-rated (such as most food and children's clothing). Exempt supplies (such as financial services and insurance) fall outside the VAT system entirely.
When do you have to register for VAT?#
You must register for VAT when your taxable turnover exceeds £90,000 in any rolling 12-month period. This is not your annual turnover — it is measured on a rolling basis, so if your sales exceed £90,000 in any 12 consecutive months you must register. You also need to register if you expect to exceed the threshold in the next 30 days alone. Once you know you have exceeded the threshold, you must register within 30 days. Missing this deadline results in penalties and being liable for the VAT you should have charged from the date you should have registered.
Should you register voluntarily before the threshold?#
Many businesses register for VAT voluntarily before they hit £90,000. The main reason to register early is if most of your customers are VAT-registered businesses — they can reclaim the VAT you charge, so it is invisible to them, and you benefit from reclaiming VAT on all your business purchases (equipment, software, subcontractors, office costs). The main reason not to register early is if your customers are consumers who cannot reclaim VAT — adding 20% to your prices either reduces your margin or makes you less competitive.
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How to register for VAT#
Register for VAT online through your HMRC business tax account at www.gov.uk/register-for-vat. You will need your business details, turnover figures, bank account details, and the date you crossed the threshold. HMRC will send your VAT registration certificate (which includes your VAT number) by post within 30 days. Most registrations now complete faster — in some cases within a week. Once registered, add your VAT number to all invoices and quotes.
How to charge VAT on your invoices#
Once VAT-registered, your invoices must show your VAT number, the net amount (excluding VAT), the VAT amount (at the applicable rate), and the gross total (net + VAT). For example, a £1,000 service would show: Net £1,000, VAT 20% £200, Total £1,200. You must keep records of all VAT invoices you issue and receive. Under Making Tax Digital (MTD), VAT-registered businesses must keep digital records and submit VAT returns using HMRC-compatible software — you cannot file by paper or use the old HMRC portal.
What can you reclaim VAT on?#
You can reclaim VAT on goods and services you purchase for business use. This includes: equipment and tools, office costs and stationery, software subscriptions, business travel and fuel (with restrictions for cars), professional services like accountants and solicitors, marketing and advertising costs, and stock. You cannot reclaim VAT on: entertaining clients, personal purchases, items for private use, or items bought from non-VAT-registered suppliers (they will not have charged VAT). Keep all VAT receipts and invoices — you need them to support your reclaim.
How to submit a VAT return#
VAT returns are usually submitted quarterly. Your VAT quarter end dates depend on when you registered. After each quarter, you have one month and seven days to submit your return and pay any VAT owed. Your return shows: total VAT charged on sales (output tax), total VAT reclaimed on purchases (input tax), and the difference — if output exceeds input, you pay HMRC; if input exceeds output (perhaps because you made a large equipment purchase), HMRC owes you a refund. Use accounting software like Xero, QuickBooks, or FreeAgent to track VAT and submit returns under MTD.
The most common VAT mistakes small businesses make#
The five most common VAT mistakes are: missing the registration deadline (costs penalties and back-payment of VAT); not keeping valid VAT invoices for reclaims (HMRC can reject claims without a proper invoice); reclaiming VAT on personal purchases; getting the wrong VAT rate (charging 20% on zero-rated goods or services); and not updating your prices when you register — if you were charging £1,000 and now need to charge £1,200, inform customers before the change takes effect.
People also ask
What is the VAT threshold in the UK in 2026?
The VAT registration threshold is £90,000 of taxable turnover in any 12-month rolling period. Once you cross this threshold you must register within 30 days.
How much VAT do I charge my customers?
The standard rate is 20% on most goods and services. A reduced rate of 5% applies to things like home energy. Many food items, children's clothes, and books are zero-rated (0%). Check GOV.UK for the rate that applies to your specific product or service.
Can I reclaim VAT before I am registered?
You can reclaim VAT on goods bought up to 4 years before registration and services bought up to 6 months before registration, provided they are still used in the business. You cannot reclaim VAT on goods already sold before registration.
What is Making Tax Digital for VAT?
Making Tax Digital (MTD) requires all VAT-registered businesses to keep digital records and submit VAT returns using HMRC-approved software. You can no longer submit VAT returns manually through the HMRC portal. Compatible software includes Xero, QuickBooks, FreeAgent, and Sage.
What happens if I register for VAT late?
HMRC can charge a late registration penalty based on the VAT you should have paid from the date you should have registered. The penalty ranges from 5% to 15% of the unpaid VAT, depending on how late you registered. You will also owe all the VAT that should have been charged, even if you did not collect it from customers.
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