As of March 2025, ONS reported that there were 2.73 million Value Added Tax (VAT) registered businesses in the UK. Despite this, many business owners are still unsure of their VAT obligations.
To help reduce the risk of non-compliance, we have created this VAT fact sheet to answer some of the most frequently asked questions.
What is VAT?
VAT is a tax charged on most goods and services in the UK, but not all. VAT rules can be complex and even well-intended businesses can make mistakes.
For Business-to-Consumer (B2C) transactions, VAT is usually included in the advertised price.
For Business-to-Business (B2B) transactions, VAT is typically shown separately, as businesses account for VAT differently than individuals.
VAT is most commonly charged at the rate of 20 per cent on applicable goods and services.
However, a reduced rate of five per cent applies to certain items such as home energy and children’s car seats.
Other goods and services must be carefully assessed so that the correct VAT is applied.
There is also a zero-rate VAT, which applies to items such as food and children’s clothing. Although no VAT is charged on these items, it may still be possible to reclaim input VAT on related costs.
When does a business need to register for VAT?
A business’s VAT obligations will depend on its taxable turnover.
If your taxable turnover exceeds £90,000 in any 12-month period, you must register for VAT. You should also register if you expect to exceed this threshold in the near future.
If you expect to cross the threshold within the next 30 days, you must register immediately. If you exceed the threshold unexpectedly, you must register within 20 days of the end of the month in which this occurred.
Failure to register on time could put you at risk of penalties from HMRC.
Any business can choose to register voluntarily, often to reclaim VAT on purchases or in anticipation of future growth.
Once registered, you will receive a unique VAT number, which should be kept secure.
Can a business deregister for VAT?
A business must deregister for VAT within 30 days if it stops trading, unless it continues as a going concern.
It may also be possible to deregister if taxable turnover falls. The deregistration threshold is £88,000 of annual taxable turnover and creates a buffer to prevent frequent switching between VAT registration and deregistration.
How is VAT managed?
Once registered, VAT is managed through Making Tax Digital (MTD) for VAT. This allows you to access VAT filings and your VAT registration certificate online.
You will also be able to see when VAT is due and how much is payable after submitting a return.
VAT returns are typically completed quarterly and submitted using MTD-compatible software or bridging software that links spreadsheets to HMRC. For businesses in a refund position, applying for monthly VAT returns may be beneficial to improve cashflow.
How do I calculate VAT?
Adding VAT to the cost of any product or service is straightforward.
For supplies subject to the standard VAT rate, all you need to do is take the price without VAT and multiply it by 1.2 and you will get the figure with 20 per cent VAT added on.
To work out the reduced VAT rate, take the price without VAT and multiply it by 1.05 and you will get the figure with the 5 per cent VAT added on.
If you are unsure of how your VAT is calculated, you should seek financial advice so your calculations are accurate.
How do VAT penalties work?
Failing to meet VAT obligations can result in penalties for several reasons.
These include:
- Failing to register VAT on time
- Late submission of VAT returns
- Late payment of VAT liabilities
Penalties will often depend on how the issue is handled.
Genuine mistakes are still penalised, but less severe than deliberate non-compliance.
Late registration penalties are based on the length of the delay and are calculated as a percentage of VAT owed.
For delays up to nine months, the penalty is five per cent.
This increases to 10 per cent for delays between nine and 18 months and 15 per cent for longer delays.
Late submissions can result in penalty points.
Once the threshold is reached, a £200 penalty applies for each late return.
The current threshold is:
- Monthly threshold: Five points
- Quarterly threshold: Four points
- Annual threshold: Two points
Penalty points do expire after two years if limits are not exceeded. If the threshold is reached, points only expire after your outstanding returns are submitted and compliance is maintained for a set period.
Late payments will incur interest and may even attract surcharges. Although there is a 15-day grace period before penalties apply.
Time to Pay arrangements can also be set up, but interest will still be charged.
Any payments between 16 and 30 days will incur a three per cent penalty.
After 30 days, an additional three per cent penalty applies, plus a daily penalty calculated at 10 per cent every year until the balance is paid.
Can VAT be reclaimed?
VAT can generally be reclaimed on goods and services used solely for business purposes when making taxable supplies. Some exceptions can apply, including business entertainment and most vehicle costs.
VAT cannot be reclaimed on items used exclusively for personal purposes. The ability to reclaim VAT is one of the main reasons why many businesses voluntarily register below the threshold.
Businesses with minimal VAT-incurring expenses may choose to deregister when possible. In these cases, the Flat Rate VAT scheme may be more suitable.
Every business is different and seeking professional advice can help you assess your VAT obligations.
Can I get support with VAT?
VAT is detailed and often complex and many industry experts continue to call for reform. Until these changes are made, it is essential to understand your responsibilities.
Our experienced team can support you with all your queries on VAT and help you stay compliant.
If you are close to the registration or deregistration thresholds, we can help assess what is best for your business.