Understanding VAT for Small Business Owners and the Self-Employed

If you’re self-employed or running a small business in the UK, getting to grips with Value Added Tax (VAT) is vital. Whether you’re approaching the VAT threshold or considering voluntary registration, this guide will help you understand how VAT works, when to register, and how to stay compliant.

What Is VAT?

VAT is a tax added to most goods and services sold in the UK. The standard rate is 20%, but some items qualify for:

• A reduced rate of 5% – e.g. mobility aids, home renovations, children’s car seats
• A zero rate (0%) – e.g. most food, books, and children’s clothing

There are four VAT schemes, each designed to suit different business needs:

• Standard Accounting Scheme
• Flat Rate Scheme
• Cash Accounting Scheme
• Annual Accounting Scheme

Choosing the right scheme can help you manage your cash flow and reporting more efficiently.

When Must You Register for VAT?

You’re legally required to register for VAT if your VAT-taxable turnover exceeds £90,000 in any rolling 12-month period (2025/26 tax year).

You must also register if you expect to go over the threshold in the next 30 days—for example, after signing a large contract.

Your VAT-taxable turnover includes all sales subject to VAT, such as:

• Standard-rated items (20%)
• Reduced-rated items (5%)

It does not include income from VAT-exempt services like certain education, healthcare, or financial services.

Should You Register Voluntarily?

If your turnover is below £90,000, you can still choose to register for VAT. This can offer some advantages:

✅ Pros of Voluntary VAT Registration

• Reclaim VAT on business expenses
• Improve cash flow, especially if you have high start-up or running costs
• Boost your credibility with other businesses and clients

⚠️ Cons to Consider

• Extra admin – VAT returns and digital record-keeping
• Clients who aren’t VAT-registered may face higher prices

Voluntary registration makes sense for some businesses, especially those trading mostly with other VAT-registered companies. If you’re unsure, speak to an accountant who can assess what’s best for your situation.

How to Register for VAT

If you need to register—or choose to voluntarily—you must notify HMRC within 30 days.

Steps to Register:

1. Go to the VAT registration page on GOV.UK.
2. Sign in with your Government Gateway account.
3. Provide:
   • Business name and contact info
   • Description of your business activities
   • Unique Taxpayer Reference (UTR)
   • National Insurance number (if a sole trader)
   • Business bank account details
   • Estimated turnover

You’ll receive a VAT registration certificate within around 30 days. It will include your VAT number, registration date, and first return deadline.

Staying Compliant with VAT

Once registered, your responsibilities include:

• Charging VAT on eligible sales
• Issuing proper VAT invoices
• Keeping a VAT account and accurate records
• Submitting VAT returns to HMRC
• Following Making Tax Digital (MTD) for VAT rules

What Is Making Tax Digital (MTD) for VAT?

MTD is a government initiative to digitise the UK’s tax system. All VAT-registered businesses, even those voluntarily registered, must:

• Keep digital records
• Use approved software to submit VAT returns

While the transition might seem daunting, using digital accounting software can automate calculations, reduce errors, and help you stay on top of your finances.

Need Expert Advice?

Deciding whether or not to register for VAT—especially voluntarily—depends on your business type, expenses, and client base. Our experienced accountants can help you:

• Understand your VAT responsibilities
• Choose the right VAT scheme
• Stay compliant with MTD and HMRC requirements

📞 Contact us today to speak to one of our VAT specialists.

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