Value Added Tax (VAT) is a consumption tax charged on most goods and services sold by VAT-registered businesses in the UK. Once your taxable turnover exceeds £90,000 in any rolling 12-month period, you are legally required to register. This hub covers everything from the registration process to returns, schemes, and Making Tax Digital compliance for 2026/27.
What is VAT and how does it work?
VAT is collected at each stage of the supply chain, but only the end consumer ultimately bears the cost. When your business is VAT-registered, you charge VAT on your sales (output VAT) and reclaim the VAT you pay on your purchases (input VAT). You pay HMRC the difference between output and input VAT through your VAT return.
For example, if you charge clients £50,000 + VAT in a quarter and pay £8,000 in VAT on your own purchases, you owe HMRC the difference: £10,000 minus £8,000 = £2,000.
If your input VAT exceeds your output VAT (common for businesses that export or have large capital purchases), HMRC will refund the difference to you.
VAT registration
You must register for VAT when your taxable turnover exceeds £90,000 in any rolling 12-month period. This is not based on the calendar year or tax year — you must check your cumulative turnover at the end of each month and look back 12 months. Once you cross the threshold, you have 30 days to notify HMRC.
There is also a forward-looking rule: if you have reasonable grounds to believe your turnover will exceed £90,000 in the next 30 days alone, you must register immediately, before the 30-day window expires.
To register, you need a Government Gateway account and the following information to hand: your business name and address, your business registration number (if a limited company), your bank account details, and an estimate of your taxable turnover. HMRC will issue your VAT registration number and certificate within 30 working days. You must charge VAT from your effective date of registration, which is typically the first day of the month following the month you crossed the threshold.
The deregistration threshold is £88,000. If your taxable turnover falls below this figure, you can apply to cancel your VAT registration.
Read the full guide: How to register for VAT UK
VAT rates 2026/27
Not all goods and services attract the standard rate. Understanding which rate applies to your products or services is essential for charging correctly and reclaiming input VAT.
| Rate | % | Applies to |
|---|---|---|
| Standard rate | 20% | Most goods and services — the default if no other rate applies |
| Reduced rate | 5% | Domestic fuel and power, children's car seats, some energy-saving products, mobility aids, nicotine patches |
| Zero rate | 0% | Most food and drink (excl. alcohol, confectionery, crisps), children's clothing, books, newspapers, passenger transport, new residential buildings |
| Exempt | N/A | Financial services, insurance, education, health, betting, burial and cremation — no VAT charged and no input VAT reclaimed on related costs |
Zero-rated and exempt are often confused. Zero-rated goods still count as taxable supplies — they contribute to your turnover for registration purposes and you can reclaim input VAT on related costs. Exempt supplies do not count as taxable turnover and you cannot reclaim input VAT attributable to exempt activities.
VAT returns
Most businesses file VAT returns quarterly. Your return covers a three-month VAT period, and both the return and any VAT payment are due one month and seven days after the end of each period. For example, if your VAT quarter ends 31 March, your return and payment are due by 7 May.
Your VAT return has nine boxes, each collecting different figures:
- Box 1 — VAT you charged on sales (output VAT)
- Box 2 — VAT on acquisitions from EU suppliers (post-Brexit, primarily Northern Ireland businesses)
- Box 3 — Total VAT due (Box 1 + Box 2)
- Box 4 — VAT you are reclaiming on purchases (input VAT)
- Box 5 — The net VAT payable to or reclaimable from HMRC (Box 3 minus Box 4)
- Box 6 — Total value of your sales, excluding VAT
- Box 7 — Total value of your purchases, excluding VAT
- Box 8 — Total value of goods dispatched to EU VAT-registered customers
- Box 9 — Total value of goods acquired from EU VAT-registered suppliers
All VAT returns must now be submitted through MTD-compatible software. You cannot use HMRC's old online VAT account to file returns.
VAT accounting schemes
HMRC offers several optional accounting schemes that can simplify VAT administration or improve cash flow. Each has eligibility criteria based on your taxable turnover.
Flat Rate Scheme
Instead of calculating the difference between output and input VAT, you pay a fixed percentage of your gross (VAT-inclusive) turnover to HMRC. The flat rate percentage varies by business sector, ranging from around 4% to 16.5%. The scheme suits businesses with low input VAT (for example, service businesses that buy little) and reduces paperwork significantly. You can join if your taxable turnover is £150,000 or less (excl. VAT).
Cash Accounting Scheme
Under standard VAT accounting, VAT is accounted for when an invoice is issued, not when payment is received. The Cash Accounting Scheme lets you account for VAT on the basis of when you actually pay and receive money. This helps businesses with slow-paying customers avoid paying VAT to HMRC before the customer has settled their invoice. You can join if your taxable turnover is £1.35 million or less.
Annual Accounting Scheme
Instead of four quarterly returns, you submit one VAT return per year. During the year, you make interim payments based on your previous year's VAT bill (nine monthly or three quarterly advance payments), and settle any remaining balance with the final return. This suits businesses with predictable VAT liabilities. You can join if your taxable turnover is £1.35 million or less.
Making Tax Digital for VAT
Making Tax Digital for VAT (MTD for VAT) is mandatory for all VAT-registered businesses, regardless of turnover. You must use HMRC-compatible software to keep digital VAT records and submit your returns. You cannot use manual spreadsheets and then type figures into HMRC's portal — there must be a digital link from your records to the submission.
HMRC-approved software options include Xero, QuickBooks, Sage, FreeAgent, and many others. Businesses that keep records in spreadsheets can use bridging software to connect their spreadsheet to HMRC's MTD system without switching to cloud accounting.
Penalties for non-compliance with MTD for VAT apply separately from late payment penalties — you can be fined for keeping records in the wrong way even if your VAT return is correct and filed on time.
Should you register for VAT voluntarily?
If your turnover is below £90,000, you can still register for VAT voluntarily. There are two main scenarios where this makes sense:
- Your customers are VAT-registered businesses. They will reclaim the VAT you charge, so the VAT does not increase their cost. Meanwhile, you can reclaim all the input VAT on your purchases, improving your margins.
- You have significant upfront costs with high VAT. If you are setting up and spending heavily before generating revenue, voluntary registration lets you reclaim that input VAT immediately.
Voluntary registration is generally not worth doing if most of your customers are private individuals (who cannot reclaim VAT), as you would effectively be adding 20% to your prices or reducing your margin by 20%.
Common VAT mistakes to avoid
- Missing the rolling 12-month threshold. Many businesses only check turnover at year-end. The threshold applies to any 12-month period — not the tax year.
- Confusing zero-rated and exempt. Zero-rated supplies are taxable (you can reclaim input VAT). Exempt supplies are not taxable (you generally cannot reclaim input VAT).
- Reclaiming VAT on business entertainment. VAT on staff entertainment is reclaimable; VAT on entertaining clients is not.
- Reclaiming VAT on cars. Unless the vehicle is used exclusively for business (no private use at all), input VAT on car purchases cannot be reclaimed. You can reclaim 50% of the VAT on leased cars.
- Not keeping digital records. Under MTD for VAT, manual records without a digital link are non-compliant, even if the figures are correct.
- Late registration. If you crossed the threshold months ago without registering, HMRC will assess back-VAT plus penalties and interest.
Key takeaways
- You must register for VAT when taxable turnover exceeds £90,000 in any rolling 12-month period — not the tax year.
- You have 30 days to notify HMRC after crossing the threshold; late registration carries a penalty based on VAT owed.
- The standard VAT rate is 20%, but zero-rated and exempt categories have important differences — only zero-rated supplies allow you to reclaim input VAT.
- VAT returns (and payment) are due one month and seven days after each VAT period ends — for most businesses, quarterly.
- MTD for VAT is mandatory for all VAT-registered businesses: you must keep digital records and file returns using HMRC-compatible software.
Frequently asked questions
What is the VAT registration threshold in 2026/27?
The VAT registration threshold remains at £90,000 of taxable turnover in any rolling 12-month period. The deregistration threshold is £88,000. Both figures apply from 1 April 2024 and are expected to remain in place until at least April 2028.
Can I reclaim VAT before I am registered?
Yes, in certain circumstances. Once registered, you can reclaim VAT on goods purchased up to four years before registration (if you still have them) and services purchased up to six months before registration, provided those goods and services are used for your VAT-taxable business.
What happens if I file my VAT return late?
HMRC operates a points-based penalty system for late VAT returns. You accumulate one penalty point for each late submission. Once you reach the threshold (four points for quarterly filers), you receive a £200 penalty. Subsequent late filings also attract a £200 penalty until you clear the points. Separate late payment penalties also apply.
Do I have to charge VAT on all my sales?
No. Only taxable supplies attract VAT, and some taxable supplies are zero-rated (0% VAT). Exempt supplies — such as insurance, financial services, and healthcare — fall outside the VAT system entirely. If all your supplies are exempt, you cannot register for VAT. If you have a mix of taxable and exempt supplies, partial exemption rules apply to your input VAT reclaim.
What is bridging software for MTD VAT?
Bridging software is a tool that takes data from a spreadsheet and submits it to HMRC's MTD system in the required digital format. It creates the digital link between your records and HMRC. This allows businesses to continue using spreadsheets for VAT record-keeping without switching to a full cloud accounting package, while still meeting MTD for VAT obligations.