Guide · VAT
UK VAT Explained: Rates, Registration Threshold and Schemes (2025/26)
Value Added Tax applies to most goods and services sold in the UK. The standard rate is 20%, with a reduced rate of 5%for items like domestic fuel and children's car seats, and a zero rate for essentials like most food, books and children's clothing. You must register for VAT once your 12-month rolling taxable turnover crosses £90,000 — a threshold raised in April 2024 from £85,000 and frozen at that level since. Every VAT-registered business must file digitally under Making Tax Digital (MTD) using HMRC-recognised software, with quarterly returns due one month and seven days after the period end. Three core schemes — Flat Rate, Cash Accounting and Annual Accounting — let small businesses simplify their administration or improve cash flow. This guide explains every rate, every threshold and the rules you need to apply them correctly.
- Rates: Standard 20%, Reduced 5%, Zero 0.0%, plus "Exempt" (outside VAT entirely).
- Registration: compulsory when 12-month rolling turnover > £90,000.
- MTD: mandatory for all VAT-registered businesses since April 2022.
- Returns: quarterly by default; monthly available on request.
- Payment deadline: one month + 7 days after the end of the VAT period.
The UK VAT rates explained
UK VAT is not a single rate. Four categories apply to different supplies, and the difference between "zero-rated" and "exempt" — which sound similar — has major commercial consequences. Here is the full picture:
| Category | Rate | Typical supplies |
|---|---|---|
| Standard | 20% | Most goods and services — electronics, restaurant meals, professional fees, adult clothing, fuel. |
| Reduced | 5% | Domestic fuel and power, children's car seats, mobility aids for the elderly, energy-saving materials, contraception, smoking cessation products. |
| Zero-rated | 0.0% | Most food (cold, non-luxury), books, newspapers, children's clothes and shoes, public transport, prescription drugs, new-build housing, exports outside the UK. |
| Exempt | No VAT | Insurance and finance, postage stamps, health and education services, betting and lotteries, most land and property transactions (with the option to tax). |
Zero-rated vs exempt: the critical difference
Both produce no VAT on the sale, but their treatment of input VAT is opposite:
- Zero-rated: the supply is taxable, so you can reclaim input VAT on related purchases. This is a genuine relief and is almost always beneficial.
- Exempt: the supply is outside VAT, so you cannot reclaim input VAT on related costs. Businesses making mostly exempt supplies become "partially exempt" and lose part of their input recovery.
A bookseller (zero-rated) reclaims VAT on shop rent and shelving. An insurance broker (exempt) cannot reclaim VAT on the same items. The accounting impact can be thousands of pounds a year for similar-sized businesses.
The £90,000 registration threshold
Compulsory VAT registration is triggered by your taxable turnover — the total of standard-rated, reduced-rated and zero-rated sales. Exempt sales do not count. Two parallel tests apply every month:
- Look-back test: at the end of every month, check your taxable turnover for the previous 12 months. If it exceeds £90,000, you must register within 30 days. Registration is effective from the first day of the month following the deadline.
- Look-forward test: if at any point you expect your taxable turnover for the next 30 days alone to exceed £90,000, you must register immediately. Registration is effective from the date you formed that expectation.
The threshold was raised from £85,000 to £90,000 on 1 April 2024 — the first increase since April 2017. The deregistration threshold rose to £88,000 at the same time.
Voluntary registration
You can register voluntarily at any time, even with £0 turnover. The benefits:
- You can reclaim input VAT on purchases — useful if you have big start-up costs (equipment, stock, fit-out).
- Credibility — clients sometimes assume non-VAT-registered businesses are very small.
- You can reclaim back-dated VAT on goods bought up to four years before registration and services up to six months before.
The downside is administration and the 20% price increase to consumer customers who cannot reclaim. For purely B2C businesses below the threshold, staying out of VAT is usually the right call.
Deregistration
You can apply to deregister once taxable turnover has dropped below £88,000 and is expected to stay below £90,000 for the next 12 months. Compulsory deregistration applies if you cease trading or stop making taxable supplies. On deregistration you account for VAT on stock and assets on hand if the output VAT exceeds £1,000.
Schemes for small businesses
HMRC offers four optional schemes that simplify administration or improve cash flow. Some are mutually exclusive — notably the Flat Rate Scheme cannot be combined with Cash Accounting.
Flat Rate Scheme (FRS)
Designed to simplify VAT for small businesses. Instead of working out the VAT on every sale and purchase, you pay HMRC a fixed percentage of your VAT-inclusive turnover.
- Eligibility: taxable turnover of £150,000 or less (excluding VAT) at the date you join.
- Flat rate: 4% – 14.5% depending on your trade sector (set by HMRC). For example, accountants pay 14.5%, IT consultants 14.5%, retailing food 4%, pubs 6.5%.
- Limited cost trader: if your VAT-inclusive goods cost less than 2% of turnover (or less than £1,000 a year), the rate is fixed at 16.5%. This effectively cancels the FRS benefit for most consultants.
- First-year discount: a 1% discount applies for the first 12 months after VAT registration.
- You keep the difference: between the 20% you charge customers and the FRS rate you pay HMRC. This is taxable income for income/corporation tax purposes.
- No input VAT recovery on most purchases — input VAT is built into the FRS rate. Capital goods over £2,000 (VAT-inclusive) can still be reclaimed separately.
The FRS is best for service-heavy, low-input businesses (consultants, designers, coaches) who would have little input VAT to reclaim anyway. It is poor for retailers, manufacturers and other businesses with high stock or material costs.
Cash Accounting Scheme
- Eligibility: taxable turnover up to £1,350,000. You must leave the scheme when turnover exceeds £1,600,000.
- Output VAT: accounted for when your customer pays you (not on invoice date).
- Input VAT: reclaimed when you pay your supplier (not on invoice date).
- Benefit: better cash flow if customers pay slowly — you don't pay HMRC for VAT you haven't collected. Built-in bad-debt relief.
- Drawback: if you generally pay suppliers quickly but get paid slowly, no real benefit. Not compatible with the Flat Rate Scheme.
Annual Accounting Scheme
- Eligibility: taxable turnover up to £1,350,000. Leave the scheme at £1,600,000.
- Returns: just one annual return.
- Payments: nine monthly instalments at 10% of last year's VAT (months 4 – 12), then a balancing payment with the return (within two months of the year end).
- Benefit: smooths cash flow and reduces admin to one return.
- Drawback: only one chance per year to reclaim refunds.
- Combinable with Cash Accounting but not Flat Rate.
Margin schemes (specialist)
For dealers in second-hand goods, antiques, works of art and used cars. You charge VAT only on the margin (your profit) rather than the full sale price. The auctioneers' scheme and global accounting scheme are variants for specific trades. Strict record-keeping is required to evidence the buying-in price for each item.
Making Tax Digital (MTD) for VAT
MTD has been mandatory for all VAT-registered businesses since 1 April 2022, regardless of turnover. The old web portal for VAT returns is closed for normal submissions. Requirements:
- Maintain digital records of every taxable transaction.
- Use HMRC-recognised software or compatible bridging software (which lets you keep using a spreadsheet but submits via the API).
- Submit returns through the MTD API, not via the gov.uk web form.
- Keep digital links between records — no manual retyping of data between systems.
Compliant software includes Xero, QuickBooks Online, Sage Business Cloud, FreeAgent, Pandle, Quaderno and many others. HMRC publishes a full list of recognised products. Penalties for non-compliance start at £100 per return and escalate for repeated breaches.
Filing and paying VAT
- Default frequency is quarterly. Three-month VAT periods are allocated to staggered "groups" — your stagger is shown on your VAT certificate.
- Monthly returns can be requested (often by exporters expecting frequent refunds).
- Filing deadline: one month and seven days after the end of the VAT period. So a quarter ending 31 March is due by 7 May.
- Payment deadline: same as filing. By Direct Debit, HMRC takes payment three working days after the filing deadline.
Penalties (2023 regime)
- Late filing: points-based. Each late submission earns a point. Hit the threshold (4 points for quarterly returns) and a £200 fine applies, then £200 for each subsequent late return.
- Late payment, first 15 days: no penalty.
- Late payment, day 16: 2% surcharge on the unpaid amount.
- Late payment, day 31: a further 2% on what is still unpaid (4% in total).
- From day 31 onwards: daily interest at 4% annualised on the outstanding balance.
Input VAT vs output VAT
- Output VAT: the VAT you charge your customers on taxable sales.
- Input VAT: the VAT you pay on goods and services bought for the business.
- Net to HMRC: output minus input. If positive, you pay HMRC. If input exceeds output (common for exporters or capital-heavy start-ups), HMRC refunds the difference.
- Commonly reclaimable: business equipment, professional fees, utilities (business proportion), stock and raw materials, fuel for business mileage (with mileage records).
- Not reclaimable: client entertainment (UK), most cars (unless wholly business use, like driving schools), goods used for personal purposes, exempt-supply inputs.
Common situations for small businesses
- EU customers post-Brexit: B2B services are usually outside the scope (customer reverse-charges). Goods sent to EU customers are exports — zero-rated with proof. B2C goods to EU consumers above the €10,000 distance-selling threshold need IOSS/OSS registration or marketplace collection.
- Construction reverse charge: since March 2021, VAT on most construction services between VAT-registered subcontractors and contractors is "reverse-charged" — the customer accounts for the VAT, not the supplier.
- Domestic reverse charge: applies to wholesale supplies of mobile phones, computer chips, and wholesale gas and electricity — designed to prevent fraud.
- Online platforms: for sales through marketplaces like Amazon or eBay, the platform may be deemed the supplier for VAT and registers/charges on your behalf, particularly for cross-border B2C sales.
Worked examples
Scenario A — Freelance designer, £75k turnover, £8k expenses
Turnover £75,000 is below the £90,000 threshold — no compulsory registration. If she registers voluntarily she would collect output VAT of £15,000 (charging clients +20%) and reclaim input VAT of about £1,333.333 on VAT-inclusive expenses. Net to HMRC: roughly £13,666.667. If clients are themselves VAT-registered they don't mind the +20% (they reclaim it). If most clients are consumers, registering would make her 20% more expensive overnight — usually better to stay out until forced.
Scenario B — IT consultant, £100k turnover, joins Flat Rate Scheme
Charges clients £120,000 (£100,000 + 20% VAT). Assume she is nota limited cost trader (she buys a fair amount of equipment), so the FRS rate is 14.5%. She pays HMRC £17,400 for the year, keeping £2,600as "FRS profit" (taxable as trading income). She cannot reclaim input VAT on most purchases, so the scheme works only because her input VAT would have been small. With the 1% first-year discount it's even better in year one.
Scenario C — Online retailer, £200k turnover
Turnover £200,000 is well above the £90,000threshold — VAT registration is compulsory. He opts for the Cash Accounting Scheme because trade customers often pay 30 – 60 days late, and he doesn't want to pay HMRC for VAT he hasn't collected. UK orders carry 20% VAT. Exports outside the UK are zero-rated with proof of shipment, so he reclaims a sizeable amount of input VAT each quarter. He files via Xero (MTD-compliant), four quarterly returns a year.
Special situations after Brexit
- Buying from the EU: import VAT applies. Postponed VAT Accounting (PVA) allows VAT-registered importers to account for import VAT on the VAT return rather than paying at the border — major cash-flow benefit.
- Selling B2C goods to EU consumers: above €10,000 cross-border sales you can register in one EU member state via the One Stop Shop (OSS), use Import One Stop Shop (IOSS) for low-value goods, or let the marketplace handle VAT.
- Selling B2B to EU customers: zero-rate the supply if the customer provides a valid EU VAT number; they apply the reverse charge.
- Northern Ireland: remains in the EU VAT area for goods (but not services). The Windsor Framework keeps NI businesses with a foot in both regimes.
Frequently asked questions
- When must I register for VAT?
- You must register within 30 days of the end of any month in which your 12-month rolling taxable turnover exceeds £90,000. You also have to register if you expect to exceed the threshold in the next 30 days alone — for example after winning a big contract. Registration takes effect from the first day of the second month after you crossed the threshold.
- Can I deregister from VAT?
- Yes. You can deregister if your taxable turnover has fallen below £88,000 and is expected to stay below £90,000 for the next 12 months. Submit form VAT7 to HMRC. Compulsory deregistration applies if you stop trading or cease making taxable supplies.
- Which VAT scheme is right for me?
- It depends on your input-to-output VAT ratio, turnover and cash flow. Service-heavy businesses with low input VAT often benefit from the Flat Rate Scheme. Businesses with slow-paying customers prefer Cash Accounting. Very small businesses with predictable trade can use Annual Accounting to reduce paperwork to one return per year.
- Do I charge VAT to overseas customers?
- Place-of-supply rules apply. B2B sales of services to a VAT-registered business in another country are usually outside the scope of UK VAT (the customer reverse-charges). Goods exported outside the UK are generally zero-rated with proof of export. B2C sales of goods to EU consumers above €10,000 require IOSS/OSS registration or marketplace collection.
- Is takeaway food VAT-able?
- Hot takeaway food and drink is standard-rated at 20%. Cold takeaway food is generally zero-rated, except for items like crisps, confectionery, ice cream and alcoholic drinks which are standard-rated. Anything consumed on the premises (eat-in) is always 20% regardless of temperature.
- What is the difference between zero-rated and exempt?
- A zero-rated supply is taxable at 0% — the business can still reclaim input VAT on related costs. An exempt supply is outside VAT entirely — no VAT charged, but no input VAT can be reclaimed either. Zero-rating is almost always better for the business; exemption typically reduces input recovery.
- How do I deregister from VAT?
- Submit form VAT7 online via your HMRC business tax account within 30 days of qualifying for deregistration. You must account for VAT on any stock and assets on hand worth more than £5,000 (output VAT > £1,000). HMRC issues a cancellation date and you stop charging VAT from that date.