VAT for small businesses: the complete UK guide for 2026/27

VAT, or Value Added Tax, is charged on most goods and services in the UK. For a small business it is both an obligation and an opportunity: an obligation because the rules are strict and mistakes are expensive, and an opportunity because, handled well, it can recover the VAT you pay on your costs. This guide explains the essentials: when to register, which rates apply, how the main schemes work, how to invoice correctly, and how to file returns under Making Tax Digital.

How VAT works in one paragraph

You charge VAT to your customers on what you sell (output VAT). You pay VAT to your suppliers on what you buy (input VAT). Each period you subtract input VAT from output VAT and pay the difference to HMRC. If input VAT is higher, HMRC refunds you. VAT is therefore not a cost to a VAT-registered business, but it is cash that passes through your account and must be accounted for accurately. Use our VAT calculator to add or remove VAT in seconds.

When you must register

You must register for VAT if your taxable turnover goes over £90,000 in any rolling 12-month period, or if you expect it to exceed that in the next 30 days alone. Taxable turnover is the total of everything you sell that is not exempt from VAT. You register through HMRC, and your registration takes effect from a date HMRC tells you.

You can register voluntarily below the threshold. That is worthwhile if your customers are mostly VAT-registered businesses, because they can reclaim the VAT you charge, and you can reclaim the VAT on your own costs. It is usually not worthwhile if you sell to consumers, because the VAT would increase your prices or reduce your margin.

You can deregister if your taxable turnover falls below the deregistration threshold, which is £88,000.

The VAT rates

Rate	Applies to	Examples
Standard 20%	Most goods and services	Consultancy, electronics, restaurant meals
Reduced 5%	Some goods and services	Domestic fuel, children's car seats
Zero 0%	Specified goods	Most food, children's clothes, books
Exempt	Outside VAT	Insurance, education, certain health services

Zero-rated and exempt are different. Zero-rated sales are taxable at 0%, so you can still reclaim input VAT on related costs. Exempt supplies are outside VAT, and you generally cannot reclaim related input VAT. A business with mainly exempt income may not be able to register at all.

VAT invoices

A VAT invoice must show, among other things, your VAT number, the invoice date, a description of the goods or services, the amount excluding VAT, the VAT rate and the VAT total. Customers can only reclaim VAT if they hold a valid invoice. Good bookkeeping software produces compliant invoices automatically. See VAT-ready bookkeeping for how we keep this clean.

VAT schemes for small businesses

Standard accounting. You account for VAT on invoice date, whether or not you have been paid. This is the default.

Cash accounting. You account for VAT only when you receive or make payment, which helps cash flow if your customers pay slowly. You can use it if your taxable turnover is under £1.35 million.

Flat Rate Scheme. You pay HMRC a fixed percentage of your VAT-inclusive turnover and do not reclaim input VAT on most purchases. The percentage depends on your trade sector. You can join if your taxable turnover is expected to be £150,000 or less, excluding VAT. In your first year of VAT registration you get a 1% discount on the rate. Businesses that spend very little on goods, less than 2% of turnover or under £1,000 a year, are classed as limited cost traders and pay 16.5%, which often removes the benefit. Read our blog on the VAT Flat Rate Scheme.

Annual Accounting Scheme. You file one return a year and pay in instalments. It reduces paperwork, though it is less flexible if your turnover changes.

Making Tax Digital for VAT

Since April 2022, all VAT-registered businesses must keep digital records and file VAT returns through Making Tax Digital compatible software. You cannot type figures into the HMRC website directly. Your software must keep a digital link between your records and your return, with no retyping of figures in the chain. Copying and pasting data between programs still counts as a digital link, but re-keying numbers by hand does not.

Most businesses file quarterly. The return and payment are due one calendar month and seven days after the end of the VAT period. If you submit and pay by direct debit, HMRC collects payment a few days later. Our checklist, Making Tax Digital for VAT in ten steps, walks through the process.

What you can and cannot reclaim

You can reclaim VAT on goods and services used for business, provided you hold a valid VAT invoice. You cannot reclaim VAT on:

• Business entertainment, such as client meals
• Items used wholly for private purposes
• Most cars bought for business use, with some exceptions
• Goods and services used to make exempt supplies

For mixed-use items, you reclaim only the business proportion. For vehicles, the fuel scale charge can apply. Keep careful records of how you decided each split.

The construction reverse charge

For most construction services supplied between VAT-registered businesses, the customer, not the supplier, accounts for the VAT. This domestic reverse charge means invoices show the VAT amount but you do not charge it. Getting this wrong is a common error. See CIS bookkeeping and our guide to bookkeeping for construction and trades.

Overseas sales and imports

VAT rules for international trade are more complex since Brexit. Goods imported into the UK carry import VAT, which VAT-registered businesses can often account for on their return using postponed VAT accounting. Selling to EU consumers can create EU VAT obligations, which many sellers handle through the One Stop Shop scheme. Services to business customers abroad are generally outside the scope of UK VAT but still need correct invoices. See bookkeeping for e-commerce sellers.

Common VAT mistakes

• Charging VAT before you are registered, or failing to charge it after you should be
• Using the wrong VAT code on a purchase
• Claiming VAT without a valid invoice
• Claiming input VAT on entertainment or private items
• Missing the registration threshold because turnover crept up
• Using the Flat Rate Scheme without checking limited cost trader status
• Filing late, which can lead to penalties and interest

A simple VAT routine

1. Code VAT correctly as you go. Fixing it at quarter-end is slow and error-prone.
2. Reconcile the VAT account to your return each quarter.
3. Set money aside. Keep VAT in a separate savings pot or account.
4. Review before filing. Check large or unusual items.
5. File early. Do not wait for the deadline.

Frequently asked questions

What is the VAT threshold for 2026/27?

£90,000 of taxable turnover in any rolling 12 months for registration, and £88,000 for deregistration.

Can I reclaim VAT before I register?

Often yes. You can reclaim VAT on goods you still hold and on services bought up to six months before registration, within HMRC's rules.

Is the Flat Rate Scheme worth it?

Sometimes. It reduces admin, but limited cost traders pay 16.5% on turnover, which often costs more than standard accounting.

Do I have to use software to file VAT returns?

Yes. Making Tax Digital for VAT requires compatible software.

Can you handle my VAT bookkeeping?

Yes. Our VAT-ready bookkeeping keeps your records correctly coded and your return figures ready. Get an instant quote.