When you must register, the schemes that can save you money, invoicing rules and what MTD for VAT means in practice
VAT (Value Added Tax) is a consumption tax charged at each stage of the supply chain. As a VAT-registered business, you act as a collector of VAT on HMRC's behalf: you charge VAT on your sales (output tax), reclaim VAT on your purchases (input tax), and pay the difference to HMRC each quarter.
If your input tax exceeds your output tax in a period — for example, because you have invested heavily in equipment — HMRC refunds the difference to you.
You must register for VAT when either of these conditions is met:
Taxable turnover means the total value of sales of standard-rated, reduced-rated and zero-rated goods and services. VAT-exempt sales (insurance, financial services, postage stamps) do not count toward the threshold.
Once registered, you must charge and account for VAT until your taxable turnover falls below the deregistration threshold of £88,000.
If your rolling 12-month turnover crosses £90,000, you must register within 30 days and start charging VAT from the date the threshold was breached. If you fail to register on time, HMRC will require you to pay VAT from the date you should have registered — even if you did not charge it to your customers. This can result in a substantial unexpected bill.
You can register for VAT voluntarily before reaching £90,000. This is worth considering if:
Voluntary registration is unlikely to be beneficial if most of your customers are consumers who cannot reclaim VAT, as you would either absorb the 20% yourself (margin hit) or pass it on (pricing hit).
| Rate | What it applies to |
|---|---|
| 20% standard rate | Most goods and services not listed below |
| 5% reduced rate | Domestic energy (gas, electricity); children's car seats; mobility aids; some renovation work; smoking cessation products |
| 0% zero rate | Most food (not restaurant/catering); children's clothing and footwear; books, newspapers, magazines; prescribed medicines; international passenger transport; new residential housing |
| Exempt | Financial services, insurance, education, health and medical care, postage stamps, betting and gaming |
The Flat Rate Scheme is designed to simplify VAT for smaller businesses. Instead of calculating and reclaiming actual input VAT on every purchase, you pay a single fixed percentage of your gross (VAT-inclusive) turnover to HMRC.
Under standard VAT, you collect 20% from customers and reclaim what you pay on costs. Under FRS, you collect 20% but only pay HMRC a lower flat rate — the margin is yours to keep.
Quarterly gross sales (inc. VAT): £30,000
VAT collected from clients: £5,000 (20/120 × £30,000)
FRS rate for IT: 14.5%
VAT paid to HMRC (FRS): £30,000 × 14.5% = £4,350
| Business type | Flat rate % |
|---|---|
| Consulting / professional services | 14.5% |
| Computer and IT services | 14.5% |
| Management consultancy | 14.0% |
| Accountancy / bookkeeping | 14.5% |
| Architect / surveyor | 14.5% |
| Hairdressing / beauty | 13.0% |
| Catering (not restaurants) | 12.5% |
| General building / construction | 9.5% |
| Retail (not food or clothing) | 7.5% |
The FRS is less beneficial if you have significant input VAT to reclaim (large equipment purchases, materials-heavy work). For capital asset purchases over £2,000 (including VAT), you can reclaim input VAT on that specific purchase even while on FRS — this is known as a capital goods purchase and must be identified separately on your return.
Under standard VAT, you account for VAT when an invoice is issued — even if you have not yet been paid. Under the Cash Accounting Scheme, you account for VAT when money actually changes hands: when you receive payment from customers, and when you pay your suppliers.
This can significantly help cash flow — you are not paying HMRC VAT on invoices that clients have not paid yet.
You leave the scheme when turnover exceeds £1.6 million. The Cash Accounting Scheme can be combined with the Flat Rate Scheme.
Instead of filing four quarterly returns per year, the Annual Accounting Scheme lets you file one return per year. During the year, you make 9 monthly interim payments based on your previous year's VAT liability (or estimated liability in year one). A final balancing payment (or refund) follows after the annual return.
The benefit is less administrative burden — one return rather than four. The downside is reduced flexibility, as you make payments throughout the year rather than having a quarterly cash view. Businesses with very variable turnover may find it less predictable.
Eligibility: taxable turnover under £1.35 million.
When you supply goods or services to another VAT-registered business, you must issue a full VAT invoice. The mandatory contents are:
For supplies under £250 (including VAT), you can issue a simplified invoice that shows: your business name, address and VAT number; the date; description of the supply; and the rate and total amount payable. The customer cannot use a simplified invoice to reclaim input VAT unless they are also the supplier (rare).
Most businesses file quarterly VAT returns. Your VAT quarter end dates depend on when you registered — HMRC assigns one of three stagger groups:
| Quarter ends | Return and payment due |
|---|---|
| 31 March / 30 June / 30 September / 31 December | 7 May / 7 August / 7 November / 7 February |
| 30 April / 31 July / 31 October / 31 January | 7 June / 7 September / 7 December / 7 March |
| 31 May / 31 August / 30 November / 28 February | 7 July / 7 October / 7 January / 7 April |
Payment must reach HMRC by the due date. Set up a Direct Debit through your Government Gateway account — this extends your payment deadline by 3 days under the direct debit collection arrangement.
Since April 2022, all VAT-registered businesses must use MTD-compatible software to keep digital records and submit VAT returns. You cannot use HMRC's old online portal to file.
HMRC maintains a list of MTD-compatible software. Popular options include:
£90,000 in taxable turnover over any rolling 12-month period. You must register within 30 days of breaching the threshold. The deregistration threshold is £88,000. You can also register voluntarily below £90,000.
It makes sense if your customers are mainly VAT-registered businesses (they can reclaim your VAT), or if you have significant input VAT to reclaim on your own costs. It is usually not beneficial if your customers are consumers, as charging VAT adds 20% to your effective price.
A simplification scheme for businesses with turnover under £150,000. Instead of tracking actual input VAT, you pay a fixed percentage of gross turnover to HMRC. The difference between the 20% you collect and the flat rate you pay keeps is your benefit. Rates vary by sector — but Limited Cost Traders (mainly service businesses with little goods spend) pay 16.5%, which eliminates most of the benefit.
Standard rate: 20% on most goods and services. Reduced rate: 5% on domestic energy, children's car seats, and certain other items. Zero rate: 0% on most food, children's clothing, books and newspapers — zero-rated businesses can still reclaim input VAT. Exempt: financial services, insurance, education — exempt businesses cannot reclaim input VAT on related costs.
Zero-rated goods/services are technically within the VAT system — you can register and reclaim input VAT. Exempt sales are outside the system — you cannot charge VAT and cannot reclaim input VAT on costs associated with those sales. Partial exemption rules apply to businesses with a mix of both.
Invoice number, your name/address/VAT number, invoice date, tax point date (if different), customer name/address, description of supply, quantity, net amount per line, VAT rate, VAT amount, and total including VAT. For invoices under £250, a simplified format is acceptable.
Since April 2022, all VAT-registered businesses must keep digital records and submit returns using HMRC-compatible software. You cannot use HMRC's old online portal. Popular options include Xero, QuickBooks, FreeAgent, Sage and bridging software for spreadsheet users.
Quarterly returns are due one month and 7 days after the end of each quarter. For a March quarter end, that is 7 May. Payment must arrive by the same date — set up a Direct Debit for a 3-day extension. If you are refunded VAT, HMRC typically pays within 10 working days of receiving your return.