A guide to VAT for small businesses: What is VAT?

If you provide goods or services, it is necessary that you understand VAT to ensure you comply with HMRC. From learning about the VAT threshold, to being aware about what VAT schemes are available, it is essential to know how VAT works as a small business.

Explore our guide below, created in collaboration with Markel Tax, published in October 2025.

What is VAT? 

Value Added Tax (VAT) is a consumption tax charged on most goods and services sold in the UK. VAT-registered businesses generally have to add VAT to the price of the goods or services they sell, in addition to being able to claim back VAT that has been added to anything which has been bought for their business.

What is the VAT threshold for small businesses?

As of 2025, the VAT threshold stands at £90,000 in the UK. If your UK taxable turnover goes above this figure in any 12-month period, or will be greater than this in the next 30-day period, you must register for VAT with HMRC. This taxable turnover does not include exempt income, but does include purchases of services from overseas suppliers (e.g. advertising and software).

What are the different VAT rates? 

There are three taxable VAT rates:

• Standard rate: 20% (applies to most goods and services).
• Reduced rate: 5% (applies to certain goods and services, such as children’s car seats and home energy).
• Zero rate: 0% (applies to certain goods and services, such as most retail food and children’s clothes).

Taxable sales do not include exempt sales – defined further down in this article.

Should I register for VAT?

You must register for VAT if your business’s UK taxable turnover exceeds the VAT threshold (£90,000 for UK-based businesses). However, you are still able to register voluntarily if you have taxable turnover below this.

How to register for VAT as a limited company or sole trader

Limited companies and sole traders can register for VAT online on the HMRC website. During the registration process, you will need to provide details about your business, including your turnover and bank details. Additional information required will depend on your business type, for example, your company registration number for a limited company or your national insurance number for a sole trader.

Once you have registered for VAT, HMRC will send you (in the post or via your Government Gateway account) the necessary information you need to begin charging VAT and submitting VAT returns.

How to calculate VAT

To calculate VAT on goods or a service you are selling, multiply the net price by the applicable VAT rate. For example, if you sell a product for £100 and the standard VAT rate is 20%, the VAT would be £100 x 0.20 = £20, and the total price to the customer would be £120. To work out the VAT applied on a VAT-inclusive basis, divide the total price by 6 for the standard rate:  e.g. £120 ÷ 6 = £20 VAT; or by 21 for the reduced rate: e.g. £105 ÷ 21 = £5 VAT.

How to submit a VAT return

VAT-registered businesses must submit VAT returns to HMRC, typically every three months. The return details the amount of VAT charged to customers and recoverable VAT paid on purchases. The difference between the two is what you pay to (or reclaim from) HMRC. Most businesses now need to keep digital VAT records and use Making Tax Digital (MTD)-compatible software to submit their returns.

You may use an accountant to assist you in preparing and submitting a VAT return, or if you manage your own finances, you can follow the below steps:

• Record your business transactions: Keep digital records of your sales and purchases on an ongoing basis in MTD-compatible software.
• Review your figures: Check your sales, VAT and purchase figures are correct by doing appropriate checks (for example bank reconciliation, supplier statement reconciliation, comparing VAT amounts to net sales and purchases and previous periods) and make any corrections accordingly.
• Total your figures for your VAT return period: At the end of your VAT return period, use your MTD-compatible software to automatically quantify your sales, purchases and VAT amounts for that period.
• Make manual adjustments: Depending on how your software is configured, you may need to manually adjust your system-generated VAT return figures for things like VAT on reverse chargeable services purchased, partial exemption or margin scheme adjustments and errors found in the system figures.
• Submit your VAT return figures online by the due date: Do this via your MTD-compatible accounting software.
• Pay any VAT due by the due date: If you have not set up a direct debit, be sure to make the payment in plenty of time to avoid late payment penalties.

What are VAT schemes for small businesses?

HMRC offers different VAT accounting schemes to help small businesses manage their VAT obligations. These include:

• Flat rate scheme: Pay a fixed percentage of your turnover as VAT.
• Annual accounting scheme: Submit just one VAT return per year and make advance payments towards your VAT bill.
• Cash accounting scheme: Pay VAT only when you receive payment from customers and reclaim VAT on purchases only when you pay your suppliers.
• Retail schemes: The 3 standard retail schemes are point of sale, apportionment and direct calculation, which simplify VAT returns allowing you to calculate the VAT you owe with each VAT return instead of each sale.
• Margin schemes for goods and Tour Operators’ Margin Scheme: You are only taxed on the difference between what you paid for an item and what you sold it for.

What is exempt from VAT?

Some sales of goods and services are exempt from VAT, such as postage stamps, many property transactions and certain supplies of education, health and financial services. Exempt sales do not count towards the VAT registration threshold and do not convey a right to recover VAT on associated costs. 

Businesses which only make exempt sales cannot register for VAT and cannot reclaim VAT on their purchases. If a business has taxable sales as well, it could be VAT-registered, but would come under partial exemption rules to work out what VAT it can recover on cost.

For a further breakdown of which goods and services are exempt, visit GOV.UK.

What are the responsibilities of VAT-registered businesses?

Once you have registered your business for VAT:

• Ensure your Ts&Cs factor in any VAT chargeable on your sales.
• Issue VAT invoices to VAT registered customers.
• Calculate and apply the correct amount of VAT on all sales.
• Keep accurate MTD-compliant VAT records of sales and purchases.
• Submit VAT returns and payments to HMRC in time.

Discover important tax dates for small businesses to remember, or read about our tax investigation insurance.

Please note: This article provides guidance for information purposes only. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional. The views expressed by websites referenced to are limited to those of the websites, and do not necessarily reflect the views of Markel Direct.