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 a lot of 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.
VAT is 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.
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 VAT input on related costs.
Other goods and services must be carefully assessed so that the correct VAT is applied.
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 below the threshold. 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, you need to remain compliant with Making Tax Digital (MTD) for VAT.
VAT returns must be completed and submitted using MTD-compatible software. VAT returns are usually completed quarterly, although some businesses can submit monthly or annually.
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 to get the VAT inclusive price.
To work out the reduced VAT rate, take the price without VAT and multiply it by 1.05.
How do VAT penalties work?
Failing to meet VAT obligations can result in penalties for several reasons.
These include:
- Failing to register for 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 they are less severe than deliberate non-compliance.
Late registration penalties are based on the length of the delay and are calculated as a percentage of the VAT that is 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 then 15 per cent after this period.
Late submissions can result in penalty points.
Once the threshold is reached, a £200 penalty applies for each late return.
The current points threshold is:
- Threshold for monthly: Five points
- Threshold for quarterly: Four points
- Threshold for annual returns: 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 be set up, but interest will still be charged.
Any late 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 wholly and exclusively for business purposes. Some exceptions apply, including entertainment 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 when their income is below the threshold.
Businesses with minimal VAT-incurring expenses may choose to deregister when possible. In some 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, therefore, it is essential to understand your responsibilities.
Our experienced team can support you with your queries on VAT and help you stay compliant.
