How does VAT work for small UK businesses?

Full answer

VAT (Value Added Tax) is a consumption tax charged at each stage of the supply chain. Businesses registered for VAT collect it on behalf of HMRC and deduct VAT they pay on purchases. **Registration threshold (2026/27): £90,000** Once your taxable turnover in any rolling 12-month period exceeds £90,000, you must register for VAT within 30 days. You can voluntarily register below this threshold — useful if your customers are VAT-registered businesses (so they reclaim VAT anyway) and you want to reclaim input VAT yourself. **VAT rates (2026/27):** | Rate | % | Examples | |---|---|---| | Standard | 20% | Most goods and services | | Reduced | 5% | Domestic energy, children's car seats, some renovation work | | Zero | 0% | Most food, children's clothing, books, public transport | | Exempt | — | Financial services, insurance, education, healthcare | **Zero-rated vs Exempt:** Zero-rated supplies are VAT-taxable at 0% — you can still reclaim input VAT. Exempt supplies are outside VAT — you cannot reclaim input VAT on costs relating to exempt supplies (partial exemption rules apply). **Quarterly filing via MTD:** VAT-registered businesses must file returns via Making Tax Digital (MTD) compatible software (Xero, QuickBooks, FreeAgent, etc.). Returns are due one calendar month and 7 days after the VAT period ends. **Flat Rate Scheme (FRS):** Businesses with turnover under £150,000 can use the FRS — pay a flat percentage of gross VAT-inclusive turnover to HMRC (e.g. 12% for IT consultants, 7.5% for management consultants). Simpler but you cannot reclaim input VAT separately. **Cash Accounting Scheme:** Pay VAT only when customers pay you (not when you invoice). Helps cash flow for businesses with slow-paying customers. Available if turnover is under £1.35 million. **Annual Accounting Scheme:** Make 9 equal monthly advance payments based on prior year VAT, then submit one annual return. Reduces admin burden.

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