What is VAT and Do I Need to Register? Simple Guide

The Accounted Business Team·8 February 2026·7 min read

What is VAT in Plain English?

Value Added Tax — VAT — is a tax charged on most goods and services sold by businesses in the UK. If you have ever looked at a receipt and seen a line for VAT at 20%, that is it. The business collects the tax from its customers and passes it on to HMRC.

The key thing to understand is that VAT is a tax on the consumer, not the business. Businesses act as unpaid tax collectors. They charge VAT on their sales (called "output VAT"), and they can reclaim the VAT they pay on their business purchases (called "input VAT"). The difference between what they collect and what they reclaim is what they pay to HMRC.

Here is a simple example:

You are a self-employed graphic designer. You charge a client £1,000 plus VAT at 20%, so the total invoice is £1,200.
You bought a new monitor for £500 plus VAT (£600 total), so you paid £100 in VAT.
You owe HMRC the difference: £200 (output VAT) minus £100 (input VAT) = £100.

That is VAT in a nutshell.

The Three VAT Rates

Not everything is taxed at the same rate. There are three VAT rates in the UK:

Standard Rate: 20%

This applies to most goods and services. If you are unsure what rate applies, it is probably 20%.

Reduced Rate: 5%

A small number of items attract a lower rate. Examples include home energy (gas and electricity), child car seats, and some energy-saving installations.

Zero Rate: 0%

Some goods and services are technically VAT-rated but at 0%. This includes most food (but not restaurant meals or hot takeaways), children's clothing, books, and newspapers. The difference between zero-rated and exempt (below) is that zero-rated businesses can still reclaim input VAT.

VAT Exempt

Some goods and services are exempt from VAT altogether. These include most financial services, education, health services, and insurance. If your business only makes exempt supplies, you cannot register for VAT (and cannot reclaim VAT on your purchases).

Do I Need to Register for VAT?

You must register for VAT if:

Your VAT taxable turnover in the last 12 months exceeds £90,000 (the current threshold for 2025/26), or
You expect your turnover to exceed £90,000 in the next 30 days alone

VAT taxable turnover means the total value of goods and services you sell that are not VAT exempt. It is based on your gross sales, not your profit.

The 12-Month Rolling Test

The £90,000 threshold is not based on the tax year or calendar year. HMRC uses a rolling 12-month period. At the end of every month, you need to look back over the previous 12 months and check if your total VAT taxable turnover exceeded £90,000. If it did, you must register within 30 days.

This catches out some business owners who think in terms of tax years. You could breach the threshold in August and need to register immediately, even though the tax year does not end until April.

When Does Registration Take Effect?

If you breach the threshold based on historic turnover (the 12-month look-back), your registration takes effect from the first day of the second month after you exceeded the threshold.

If you expect to breach it in the next 30 days (for example, you have just won a huge contract), registration takes effect from the beginning of that 30-day period.

You must apply to HMRC within 30 days of triggering either test.

Voluntary Registration

Even if your turnover is below £90,000, you can choose to register for VAT voluntarily. Why would you?

Reasons to Register Voluntarily

You can reclaim VAT on purchases — If your business has significant expenses that include VAT (equipment, materials, professional services), registering lets you reclaim that VAT. This can be worthwhile if you spend a lot on VAT-able items.
Professional credibility — Some larger businesses prefer to work with VAT-registered suppliers. Being registered can signal that your business is established and above a certain size.
You mainly sell to VAT-registered businesses — If your customers are VAT-registered, they can reclaim the VAT you charge, so it does not cost them anything extra. You benefit by being able to reclaim your input VAT.

Reasons Not to Register Voluntarily

Your customers are consumers — If you sell to the general public, adding 20% VAT to your prices makes you more expensive (or reduces your margin if you absorb it). Non-VAT-registered competitors do not have this problem.
Administrative burden — You must file VAT returns (usually quarterly), keep detailed VAT records, and comply with Making Tax Digital requirements. This takes time and effort.
Cash flow impact — You collect VAT from customers and hold it until you file your return, but the timing does not always work in your favour, especially if you have long payment terms.

What Happens When You Register?

Once HMRC approves your registration, you will receive a VAT registration number. From your effective date of registration, you must:

Charge VAT on your sales at the appropriate rate
Issue VAT invoices that include your VAT number, the VAT rate, and the VAT amount
Keep detailed records of all sales and purchases, including VAT amounts
File VAT returns — usually every quarter, but monthly or annually in some cases
Pay the VAT you owe to HMRC (or receive a refund if your input VAT exceeds your output VAT)
Use MTD-compatible software to keep digital records and submit your returns. This is where Accounted comes in — our platform is fully MTD-compliant for VAT.

The Three Main VAT Schemes

HMRC offers several schemes designed to simplify VAT for smaller businesses. The three most commonly used are:

1. Standard VAT Accounting

This is the default method. You account for VAT based on the date of your invoices, regardless of when you actually get paid. You file quarterly returns and pay the difference between output and input VAT.

The downside: if a customer is slow to pay, you still owe HMRC the VAT on the invoice date. This can hurt cash flow.

2. VAT Cash Accounting Scheme

Under cash accounting, you only account for VAT when money actually changes hands. You do not owe output VAT until your customer pays you, and you cannot reclaim input VAT until you pay your supplier.

This is better for cash flow, especially if you have customers who pay slowly. You can use this scheme if your estimated VAT taxable turnover is £1.35 million or less.

3. VAT Flat Rate Scheme

The Flat Rate Scheme simplifies things further. Instead of tracking the VAT on every individual purchase and sale, you pay a fixed percentage of your gross turnover to HMRC. The percentage depends on your trade sector (for example, 14.5% for computer consultancy, 12% for photography).

You cannot reclaim input VAT on most purchases (except capital assets over £2,000), but the flat rate percentage is lower than 20%, so the scheme can be simpler and sometimes cheaper.

However, since the "limited cost trader" rules were introduced, businesses that spend very little on goods (less than 2% of turnover or less than £1,000 per year) must use a higher flat rate of 16.5%, which often eliminates any saving.

Common VAT Mistakes to Avoid

Missing the registration threshold — Not monitoring your rolling 12-month turnover and registering late. Late registration means you owe VAT on sales from the date you should have registered, even if you did not charge it.
Charging VAT before registration — You cannot charge VAT unless you are registered. If you do, customers cannot reclaim it and you could face penalties.
Claiming VAT on non-business items — You can only reclaim VAT on purchases that are genuinely for business use.
Forgetting to file returns on time — Late filing attracts penalties under HMRC's points-based system. Each late return earns a point, and once you hit the threshold, you receive a £200 penalty.

Let Accounted Handle the VAT Headache

VAT does not have to be complicated. Accounted tracks your income automatically, so you will know the moment you approach the £90,000 threshold. If you are already VAT-registered, Penny, our AI bookkeeper, categorises your transactions with the correct VAT treatment and helps you prepare your VAT returns with confidence. Everything is MTD-compliant out of the box.

Start your free trial of Accounted today and take the stress out of VAT — whether you are approaching the threshold or already filing quarterly returns.

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