VAT for small businesses in the UK: registration, rates, schemes and returns

When do you have to register for VAT?

You must register when your VAT taxable turnover for the last 12 months goes over £90,000, or when you expect it to go over £90,000 in the next 30 days alone. The threshold has been £90,000 since 1 April 2024.

VAT taxable turnover is the total of everything you sell that is not VAT exempt. Zero-rated sales count. Exempt and out-of-scope sales do not.

There are two separate tests, and either one can catch you:

The forward test is for a single big month: for example, a wholesale contract that alone will bring in more than £90,000 within 30 days.

How does the rolling 12-month test work?

The "last 12 months" is a window that moves forward one month at a time. It is not your tax year or your accounting year. At the end of every month, add up the last 12 months of taxable sales.

Here is a growing shop checking its numbers each month in 2026:

Each month the new month comes in and the same month a year earlier drops out. The total crosses £90,000 at the end of September 2026. So this shop must:

• register by 30 October 2026 (within 30 days of the end of September), and
• charge VAT from 1 November 2026, the first day of the second month after it went over.

If you are close to the line, check the total every month. Being a few hundred pounds over still means you must register.

You can also register voluntarily below £90,000. Once registered, you can usually reclaim VAT on goods bought up to 4 years before registration (if you still have or use them) and on services bought up to 6 months before.

If turnover later drops, you can apply to deregister once your taxable turnover falls below £88,000.

What VAT rate applies to what you sell?

There are three rates: standard 20%, reduced 5% and zero 0%. Most goods and services are standard-rated. Most food, children's clothes and books are zero-rated. Domestic energy is 5%.

Food is where most small businesses get caught out, because the rate depends on what the item is and how it is sold:

For takeaway food, HMRC treats it as hot (so 20%) if it is hot and was heated so it can be eaten hot, heated to order, kept hot after cooking, sold in packaging that keeps it hot, or advertised as hot. Most cold takeaway food is zero-rated, except items that are always standard-rated, such as crisps and sweets.

When a wholesaler charges 20% on a case of crisps, a VAT-registered shop buying it can reclaim that VAT on its own return.

How do you add VAT to a price, or take it out?

To add 20% VAT, multiply the net price by 1.2. To find the VAT inside a price that already includes 20%, divide that price by 6. HMRC calls this the VAT fraction: 20/120, which is one-sixth.

Adding VAT (you set prices before VAT):

• Net price: £50.00
• VAT at 20%: £50.00 × 20% = £10.00
• Price to the customer: £60.00

Taking VAT out (you set shelf prices that include VAT):

• Shelf price: £60.00
• VAT inside it: £60.00 ÷ 6 = £10.00
• Net price you keep: £50.00

The common mistake is to take 20% of the shelf price: £60.00 × 20% = £12.00. That overstates your VAT by £2 on every £60 of sales, and your margin reports will be wrong too.

A wholesale example. A wholesaler sells a case of crisps for £18.00 plus VAT. The invoice shows £18.00 net, £3.60 VAT and £21.60 total. The shop pays £21.60, reclaims the £3.60 on its VAT return, and then charges VAT on its own sales of the crisps.

For 5% items, the VAT fraction is 5/105, which is one twenty-first. You can check any of these sums with the VAT calculator.

Which VAT schemes can make it simpler?

HMRC has three schemes that suit small businesses. Each has a turnover limit to join and a limit at which you must leave.

Flat Rate. The percentage depends on your business type, and you cannot reclaim VAT on purchases except certain capital assets over £2,000. If your goods cost less than 2% of your turnover, or less than £1,000 a year, you are a "limited cost trader" and pay 16.5%. In your first year of VAT registration you get 1% off your flat rate. Example: a business with £80,000 of sales plus £16,000 VAT has a VAT-inclusive turnover of £96,000. As a limited cost trader it pays 16.5% × £96,000 = £15,840. Shops and wholesalers buy a lot of stock, so they rarely benefit. Look up your sector's percentage on GOV.UK and compare it with your normal VAT before you join.

Cash Accounting. You raise a £1,200 invoice (£1,000 + £200 VAT) in March, and the customer pays in May. You account for the £200 in the period that includes May, not March. It helps cash flow if you give customers credit. The flip side is that you only reclaim VAT on purchases once you have paid for them.

Annual Accounting. If your VAT bill last year was £12,000, you can pay 9 monthly instalments of 10% (£1,200 each, at the end of months 4 to 12) or 3 quarterly instalments of 25% (at the end of months 4, 7 and 10). Your one return is due 2 months after the year ends, with a balancing payment. It suits steady businesses. It does not suit you if you usually get VAT refunds, because you get only one refund a year.

When are VAT returns and payments due?

The deadline to submit your return and to pay is normally one calendar month and 7 days after the end of the VAT period. Most businesses use quarterly periods.

Your payment must reach HMRC by the deadline, even if it falls on a weekend or bank holiday. All VAT-registered businesses must keep digital records and file through software that works with Making Tax Digital. See Making Tax Digital in the UK for what that means in practice.

What are the penalties for late returns and late payment?

Late returns earn penalty points, and late payments cost a percentage of what you owe. They are separate systems.

Late returns. Each late return adds a point. A £200 penalty is charged when you reach the threshold for your filing frequency, and another £200 for each further late return while you are at it. Nil and repayment returns count too.

Late payment (from 1 April 2025). Say you owe £6,000 for the quarter, due on 7 November.

• Still unpaid on day 15: penalty of 3% = £180.
• Still unpaid on day 30: another 3% of what is outstanding then = £180.
• From day 31: a daily penalty at 10% a year until you pay.

Paying late by a month on a £6,000 bill already costs £360 before the daily charge. If you cannot pay in full, contact HMRC before the deadline.

What records do you have to keep?

You must keep VAT records for at least 6 years. That covers every sale and purchase, the VAT on each, your VAT invoices issued and received, credit notes, and your VAT account (the summary that links your records to your return).

Most of these must now be kept digitally. Every VAT invoice you issue must show certain details. See VAT invoice requirements for the full checklist.