VAT is the tax most small businesses dread — and the one most likely to catch you out as you grow. Cross £90,000 of turnover and registration is no longer optional; get the rates wrong and you over- or under-charge your customers. This 2026/27 guide explains the registration threshold, the 20% standard rate alongside the 5% reduced and 0% zero rates, when voluntary registration helps, how the Flat Rate Scheme can simplify life, what Making Tax Digital for VAT means in practice, and exactly how a VAT return and input/output VAT work. A worked example pulls it all together.
You must register for VAT once your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period — or if you expect to exceed it in the next 30 days alone. The test is on a rolling basis, not your accounting year, so check your trailing 12-month turnover every month as you approach the limit.
Miss the deadline and HMRC can backdate your registration, leaving you owing VAT you never charged plus penalties. Once registered you must charge VAT on your taxable sales, file returns, and keep digital records. The threshold has been frozen, so more growing businesses are crossing it each year. See the VAT registration guide for the mechanics.
Standard, Reduced and Zero Rates
VAT is not one rate. Getting the right rate on each supply is fundamental:
Rate
Applies to
20% standard
Most goods and services
5% reduced
Domestic fuel & power, children's car seats, some energy-saving materials
0% zero
Most food, children's clothing, books, newspapers
Exempt
Insurance, many financial, health & education services
The crucial distinction is zero-rated vs exempt: both charge the customer nothing, but zero-rated supplies still let you reclaim input VAT, while exempt supplies do not. Add or strip VAT from any figure with the VAT calculator.
Voluntary Registration
You can register below £90,000. Whether you should comes down to your customers:
Mostly B2B customers (VAT-registered): they reclaim the VAT you charge, and you reclaim VAT on your own purchases — often a net win, and it looks more established.
Mostly consumers or non-registered customers: they cannot reclaim, so adding 20% either raises your price or eats your margin — usually a reason not to register voluntarily.
Weigh your input VAT recovery against the impact on your prices before opting in. The same logic, in reverse, applies if you later consider deregistering.
The Flat Rate Scheme
The Flat Rate Scheme (FRS), open to businesses with VAT-taxable turnover up to £150,000, swaps detailed input/output tracking for a single fixed percentage of your gross (VAT-inclusive) turnover, set by your trade sector.
You still charge customers 20% but keep the difference between that and your flat-rate payment — which can leave a small surplus for some sectors. The catch: you generally cannot reclaim input VAT on purchases, except certain capital assets over £2,000. Businesses with very low costs are classed as “limited cost traders” and pay a higher 16.5% flat rate, which usually removes the benefit.
FRS suits low-cost service businesses with simple affairs; cost-heavy businesses are usually better off on standard accounting. See the Flat Rate Scheme guide.
Making Tax Digital for VAT
Making Tax Digital (MTD) for VAT applies to every VAT-registered business, whatever its turnover. You must keep digital VAT records and file returns through MTD-compatible software — not the old manual online form.
In practice that means using bookkeeping or bridging software linked to HMRC, with a “digital link” preserved through your records. If you are registering now, pick MTD-compatible software from the start so compliance is built in. This is separate from MTD for Income Tax, which is being phased in for sole traders and landlords.
VAT Returns and Input/Output VAT
A VAT return — usually quarterly — reports two figures: the VAT you charged customers (output VAT) and the VAT you paid on business purchases (input VAT). You pay HMRC the difference.
Output VAT > input VAT: you pay HMRC the difference.
Input VAT > output VAT: HMRC refunds you — common for businesses making large purchases or zero-rated sales.
Returns and payments are normally due one month and seven days after the period ends, filed through MTD software. Keep every VAT invoice — you need them to support input VAT claims, and HMRC can ask to see them.
Worked Example: A £100,000 Service Business
Consider a VAT-registered consultancy with £100,000 of standard-rated sales and £6,000 of input VAT on costs in a year. Figures are illustrative for 2026/27.
Input VAT reclaimed: £6,000 on business purchases.
VAT due to HMRC (standard accounting): £20,000 − £6,000 = £14,000.
The £20,000 was never the business's money — it was collected on HMRC's behalf.
On the Flat Rate Scheme the sum would differ — a fixed percentage of the £120,000 gross turnover, with no input VAT reclaim. Compare both routes and add or remove VAT from any figure with the VAT calculator.
You must register for VAT once your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect to exceed it in the next 30 days alone. The £90,000 figure is the registration threshold for 2026/27. The test is on a rolling basis, not your accounting year, so you should check your trailing 12-month turnover every month as you grow. You can also register voluntarily below the threshold. Failing to register on time can lead to backdated VAT and penalties, so monitoring turnover is essential as you approach the limit.
What is the standard rate of VAT in the UK?
The standard rate of VAT is 20% and applies to most goods and services. There is also a 5% reduced rate for certain supplies such as domestic fuel and power, children’s car seats and some energy-saving materials, and a 0% zero rate for items including most food, children’s clothing, books and newspapers. Some supplies are exempt (for example insurance, certain financial services, and some education and health services) — exempt is different from zero-rated, because you cannot reclaim input VAT on costs relating to exempt supplies.
Should a small business register for VAT voluntarily?
It depends who your customers are. If you mainly sell to other VAT-registered businesses, voluntary registration lets you reclaim the VAT on your purchases while your customers reclaim the VAT you charge them — so it can be a net win and makes you look more established. If you sell mostly to consumers or non-registered businesses who cannot reclaim, adding 20% makes you more expensive or squeezes your margin, so voluntary registration usually hurts. Weigh your input VAT recovery against the impact on your prices before opting in.
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What is the VAT Flat Rate Scheme?
The Flat Rate Scheme (FRS) simplifies VAT for small businesses with VAT-taxable turnover up to £150,000. Instead of tracking input and output VAT on every transaction, you pay HMRC a fixed percentage of your gross (VAT-inclusive) turnover, with the percentage set by your trade sector. You still charge customers 20% but keep the difference between that and your flat-rate payment, which can be a small profit for some businesses. The trade-off is that you generally cannot reclaim input VAT on purchases (except certain capital assets over £2,000). “Limited cost traders” pay a higher 16.5% flat rate.
What is Making Tax Digital for VAT?
Making Tax Digital (MTD) for VAT requires all VAT-registered businesses to keep digital VAT records and submit their VAT returns using MTD-compatible software rather than typing figures into the old online form. It applies to every VAT-registered business regardless of turnover. In practice this means using bookkeeping or bridging software that connects to HMRC’s systems, with a “digital link” preserved through your records. If you are registering for VAT, you should choose MTD-compatible software from the outset to stay compliant.
How does a VAT return work?
A VAT return — usually filed quarterly — reports the VAT you charged customers (output VAT) and the VAT you paid on business purchases (input VAT). You pay HMRC the difference: output VAT minus reclaimable input VAT. If your input VAT exceeds your output VAT in a period (common for businesses making large purchases or zero-rated sales), HMRC refunds the difference. Returns and payments are normally due one month and seven days after the end of the VAT period. Under MTD they must be filed through compatible software.
What is the difference between zero-rated and exempt supplies?
Both mean no VAT is charged to the customer, but the consequences differ. Zero-rated supplies (such as most food, books and children’s clothing) are technically taxable at 0% — so you can still reclaim the input VAT on related costs. Exempt supplies (such as insurance and many financial and health services) are outside the scope of VAT recovery — you charge no VAT but also cannot reclaim input VAT on costs relating to them. A business making only exempt supplies generally cannot register for VAT at all, while a zero-rated business often registers to recover its input VAT.
Can I reclaim VAT on business purchases?
If you are VAT-registered (and not on a scheme that blocks it, like the Flat Rate Scheme), you can reclaim the input VAT on goods and services bought for your business, provided you hold a valid VAT invoice. You cannot reclaim VAT on purely personal items, on most business entertainment, or on cars used privately. You can sometimes reclaim VAT on purchases made before registration — generally up to four years for goods you still hold and six months for services. Keep all VAT invoices, as HMRC can ask to see them.
What happens if I deregister or fall below the threshold?
You can deregister if your VAT-taxable turnover falls below the deregistration threshold (which sits just below the £90,000 registration threshold). Deregistration is voluntary in that case — you might stay registered to keep reclaiming input VAT. On deregistration you may have to account for VAT on the value of stock and assets you still hold on which you previously reclaimed VAT. If you stop trading or your business changes so it no longer makes taxable supplies, you must deregister. The decision should weigh customer profile and input VAT recovery, much like voluntary registration.
How much VAT will I actually pay HMRC?
Under standard VAT accounting, you pay HMRC your output VAT (20% of standard-rated sales, or the relevant rate) minus the input VAT you reclaim on purchases — not 20% of your whole turnover. So a business with £100,000 of standard-rated sales charges £20,000 of VAT, but if it incurred £6,000 of input VAT on costs, it pays HMRC £14,000. Under the Flat Rate Scheme the calculation is different: a fixed percentage of gross turnover. Use a VAT calculator to add or remove VAT from a figure and estimate your net position.
Disclaimer: This guide reflects 2026/27 UK VAT rules. The registration threshold, VAT rates, the Flat Rate Scheme percentages and the MTD requirements change at fiscal events, and VAT liability is highly fact-specific to your supplies and customers. Consult a qualified accountant before registering, choosing a scheme or filing, and refer to gov.uk for current official rates.