Understanding VAT for Small Businesses

Businesses act as tax collectors for HMRC by charging VAT on their sales (output tax) and reclaiming VAT on eligible purchases (input tax). Getting VAT right is essential for both compliance and cash flow management. Moreover, understanding when to register and how to file correctly helps you avoid penalties and plan your finances efficiently.

When You Must Register for VAT

For the 2025/26 tax year, the VAT registration threshold remains £90,000 of taxable turnover in a 12-month period.

You must register for VAT if:

• Your turnover exceeds £90,000 in the last 12 months, or
• You expect to exceed the threshold within the next 30 days, or
• You buy services from abroad where reverse charge VAT applies.

You can also voluntarily register if your turnover is below the threshold. Doing so allows you to reclaim VAT on business-related purchases.

How to Register for VAT

Registration is completed online through the HMRC VAT portal.
Once you register, you’ll receive a VAT registration number. From that date, you must begin charging VAT on all taxable sales.

After registering, make sure to:

• Display your VAT number on every invoice.
• Keep accurate VAT records and receipts.

Filing VAT Returns

Businesses normally submit VAT returns quarterly, which include:

• Total sales and purchases
• VAT owed to HMRC (output tax)
• VAT you can reclaim (input tax)

Your VAT bill is calculated using this formula:
Output VAT – Input VAT = VAT payable or reclaimable

All VAT returns must be submitted digitally using Making Tax Digital (MTD)-compatible software.

👉 Deadline: Returns and payments are due within one month and seven days after the end of your accounting period. Submitting early helps you avoid last-minute errors or delays.

Common VAT Schemes for Small Businesses

Different VAT schemes can simplify accounting and improve cash flow. The most common ones include:

1. Flat Rate Scheme
   This scheme allows you to pay a fixed percentage of turnover instead of tracking VAT on each transaction. It’s ideal for small or service-based businesses.
2. Cash Accounting Scheme
   You pay VAT only when you receive payments from customers. This method helps manage cash flow more effectively.
3. Annual Accounting Scheme
   You make advance VAT payments throughout the year and submit one annual VAT return. This approach reduces paperwork and smooths payment schedules.

Key Takeaways

Registering for VAT on time ensures compliance and supports better financial management. Use the right VAT scheme for your business size and type, and always file your returns through MTD-compatible software.

For more guidance, visit the official HMRC VAT registration portal and stay informed about updates for the 2025/26 tax year.