Journey

Understanding VAT from scratch

A complete introduction to VAT for first-time registrants. Takes you from zero knowledge to confident VAT compliance, covering when to register, how to charge VAT, reclaiming VAT on purchases, and submitting your returns.

Starting a Business Updated 15 September 2026

5 milestones references 6 guides

What you will learn

This learning path takes you through everything you need to know about VAT as a new registrant. By the end, you will understand:

Whether you need to register for VAT (and when voluntary registration makes sense)
How to complete the registration process
How to charge VAT correctly on your sales
How to reclaim VAT on your business purchases
How to submit VAT returns and pay what you owe

Each step builds on the previous one, so work through them in order.

Do I need to register for VAT?
Not every business needs to register for VAT. Your first decision is whether registration is mandatory (you have no choice) or voluntary (a business decision). This step helps you understand the threshold and calculate your position.
The VAT registration threshold

You must register when your taxable turnover exceeds £90,000 in any rolling 12-month period. Zero-rated sales count towards this threshold, but exempt sales do not.
VAT registration becomes mandatory when your taxable turnover exceeds £90,000 in a rolling 12-month period (as of 1 April 2024). You can also register voluntarily below this threshold.

Mandatory threshold

£90,000 taxable turnover in rolling 12 months

Registration deadline

30 days after exceeding threshold

Voluntary registration

Allowed at any turnover level

Deregistration threshold

£88,000 - can deregister if turnover falls below

Standard rate

20% (most goods and services)

Reduced rate

5% (domestic fuel, children's car seats, etc.)

Zero rate

0% (most food, books, children's clothes, etc.)

What counts as 'taxable turnover':
Includes: Standard-rated, reduced-rated, and zero-rated sales
Excludes: VAT-exempt sales (insurance, finance, education, health), goods sold outside the UK
Calculate over rolling 12-month period - if last 12 months exceed £90,000, you must register
Future test: If you expect to exceed £90,000 in next 30 days alone, register immediately

Making Tax Digital (MTD) for VAT - mandatory for ALL VAT-registered businesses:
You must keep digital VAT records using MTD-compatible software
Submit VAT returns directly from the software via HMRC API
Applies to all VAT-registered businesses regardless of turnover (since April 2022)
Penalties for non-compliance: Points-based penalty system (4 points for quarterly, 5 for monthly, 2 for annual filers trigger penalties). Late filing penalties start from £200 per late submission after reaching penalty point threshold

Should you register voluntarily below £90,000?
Reasons TO register:
Reclaim VAT on business purchases and expenses (especially valuable for high capital expenditure)
Appear more established and professional to B2B customers
Necessary to trade with VAT-registered B2B customers who want VAT invoices
Reasons NOT to register:
Administrative burden of VAT returns, MTD software, and record-keeping
20% price increase if selling to consumers who cannot reclaim VAT
Cash flow impact - you collect VAT from customers and pay it to HMRC before receiving payment if not using Cash Accounting scheme

VAT schemes for small businesses:
Flat Rate Scheme - pay flat percentage (6.5%-14.5% depending on sector) of gross turnover instead of tracking input VAT. If you're a "limited cost trader" (goods costs under 2% of turnover, or under £1,000/year), you must use a higher 16.5% rate instead. Available when joining VAT if turnover under £150,000. You must leave the scheme if turnover exceeds £230,000 (including VAT).
Cash Accounting - pay VAT when customers pay you, not when you invoice. Join if turnover under £1.35 million, leave if exceeds £1.6 million.
Annual Accounting - file one VAT return per year instead of four, make advance payments. Join if turnover under £1.35 million, leave if exceeds £1.6 million.

Penalties for late registration:
You must pay VAT due from when you should have registered, even if you did not charge customers
Late registration penalty: Percentage of VAT due for period of non-registration based on behaviour: Non-deliberate 0-30%, Deliberate 20-70%, Deliberate and concealed 30-100%. Minimum penalty £50
Criminal prosecution possible for deliberate failure to register

Deregistration - if your turnover falls below £88,000 (deregistration threshold), you can choose to deregister. You must deregister if you stop making taxable supplies altogether.

Register for VAT online (opens in a new tab)

Official source - gov.uk/vat-registration-thresholds
Check if you need to register for VAT

Learn how to calculate your taxable turnover using the rolling 12-month test, understand the difference between taxable and exempt supplies, and determine whether you must register now or should monitor your position

Guv’s take

Approaching the threshold? If your turnover is between £70,000 and £90,000, you should calculate your rolling 12-month total at the end of each month. Being caught unaware by threshold breach leads to penalties for late registration.
Register for VAT
Once you've determined you need to register (or have decided to register voluntarily), you need to complete the registration process. HMRC provides an online service that most businesses can complete themselves.

How to register for VAT

Step-by-step guidance on completing your VAT registration online, what information you need, and what happens after you register

Take note

Registration deadline: If you've exceeded the threshold, you must register within 30 days of the end of the month in which you exceeded it. Late registration means you owe VAT from when you should have registered, even if you did not charge customers.
What happens after registration

After registering, HMRC will:
- Send you a VAT registration certificate with your VAT number (usually within 30 working days)
- Assign you a 'stagger group' determining your quarterly VAT periods
- Expect you to start charging VAT from your effective date of registration
You will also need to set up Making Tax Digital (MTD) compatible software, as all VAT-registered businesses must keep digital records and submit returns electronically.
Charge VAT on your sales

Once registered, you must charge VAT on most goods and services you sell. This is called 'output VAT'. Getting the rate right and issuing proper VAT invoices is essential for compliance.

Understanding VAT rates

Most goods and services are charged at 20% (standard rate), but some attract 5% (reduced rate), 0% (zero rate), or are exempt from VAT entirely.

Standard rate

20%

Effective from

4 January 2011

Previous rate

17.5% (until 3 January 2011)

The standard rate of VAT applies to most goods and services supplied in the UK unless they are specifically zero-rated, reduced-rated, or exempt.

Standard-rated examples

Most professional services, electrical goods, furniture, clothing (adult), alcohol, soft drinks, restaurant meals, hotel accommodation

When VAT is charged

On the value of supplies made by VAT-registered businesses

Who must charge standard rate

VAT-registered businesses making taxable supplies

VAT rates on different goods and services (opens in a new tab)

Zero-rated vs exempt - a crucial distinction

Zero-rated supplies are still taxable (you can reclaim input VAT), while exempt supplies are not taxable (you cannot reclaim related input VAT). This affects your VAT recovery calculations.

Zero rate

0%

Key distinction

Zero-rated is taxable (allows input VAT recovery). Exempt is not taxable (no input VAT recovery).

Zero-rated supplies are still taxable supplies, but the rate of VAT is 0%. This means you can reclaim VAT on your business purchases (input VAT) even though you charge no VAT on sales.

Food (most)

0% - basic foodstuffs (not catering, hot food, confectionery, alcohol, soft drinks)

Books and publications

0% - printed books, newspapers, journals (physical)

Children's clothing

0% - clothing and footwear for children under 14

Public transport

0% - buses, trains, aircraft (not taxis)

Exports

0% - goods exported outside the UK (with evidence)

New residential construction

0% - building new dwellings (not commercial)

Drugs and medicines

0% - dispensed on prescription

VAT rates on different goods and services (opens in a new tab)

How to charge VAT correctly

Learn which VAT rate applies to your goods and services, when VAT becomes due (tax point rules), and how to create compliant VAT invoices

Guv’s take

VAT invoices: When selling to other VAT-registered businesses, you must issue a VAT invoice within 30 days. For sales over £250, this must be a 'full' VAT invoice with 11 mandatory items including your VAT number, the customer's name and address, and a breakdown of VAT by rate.
Reclaim VAT on your purchases
One of the main benefits of VAT registration is reclaiming VAT you pay on business purchases. This is called 'input VAT'. Understanding what you can and cannot reclaim is essential for managing your VAT position.

Reclaim VAT on business purchases

Learn what you can reclaim VAT on, what evidence you need, blocked items you cannot reclaim, and how to handle pre-registration purchases
Key reclaim rules to remember
- You need a valid VAT invoice - no invoice, no reclaim
- The purchase must be for business use - personal items do not qualify
- Some items are blocked - business entertainment and most car purchases cannot be reclaimed
- Pre-registration purchases - you can reclaim VAT on goods still held at registration (up to 4 years back) and services received within 6 months before registration
Take note

Blocked input tax: You cannot reclaim VAT on business entertainment (client meals, hospitality) or on cars unless they are used 100% for business (taxi, driving school, genuine pool car). These are common errors that HMRC looks for in compliance checks.
Submit your VAT returns
Most VAT-registered businesses submit quarterly returns. Each return calculates the difference between the VAT you have charged (output) and the VAT you can reclaim (input). You either pay the difference to HMRC or receive a refund.

VAT return deadlines

Your VAT return and any payment due must reach HMRC by 1 month and 7 days after the end of your VAT period. Late submissions trigger penalty points that accumulate towards financial penalties.

Standard quarterly deadline

1 calendar month and 7 days after the end of the VAT accounting period

Electronic payment deadline

Same as return deadline (1 month and 7 days) if paying electronically

Non-electronic payment deadline

1 calendar month after the end of the VAT accounting period (7 days earlier than electronic)

Monthly returns deadline

1 calendar month and 7 days after the end of each monthly period

First return after registration

Covers period from effective date of registration to end of first VAT quarter; deadline is 1 month and 7 days after that quarter ends

Making Tax Digital
Since April 2022, all VAT-registered businesses must keep digital records and submit returns using MTD-compatible software. Paper returns are no longer accepted except in specific exemption cases.

Annual Accounting Scheme - interim payments

9 monthly or 3 quarterly interim payments based on previous year's VAT liability

Annual Accounting Scheme - return deadline

2 months after the end of the annual accounting period

Annual Accounting Scheme - balancing payment

Due with the annual return, 2 months after period end

Annual Accounting Scheme - eligibility

Estimated VAT-taxable turnover of £1.35 million or less in the next 12 months

Non-standard VAT periods
HMRC may assign different accounting periods (monthly or non-standard quarters) based on business circumstances. Monthly returns are typically required for businesses regularly claiming VAT refunds or those HMRC wishes to monitor more closely.
Businesses can request monthly returns if they regularly reclaim more VAT than they pay (e.g., exporters).

Late submission penalty (first offence)

Warning letter (no financial penalty for first late return in 12 months)

Late submission penalty (repeated)

Points-based system - financial penalty when threshold reached

Late payment interest

Interest charged from day after payment due date at Bank of England base rate plus 4% (from 6 April 2025)

Record keeping

VAT records must be kept for 6 years

Submit your VAT Return (opens in a new tab)

How to complete your VAT return

Understand the 9-box VAT return, what goes in each box, common mistakes to avoid, and how to submit using Making Tax Digital software
The VAT calculation in brief

Your quarterly VAT position is simply:
- Output VAT (VAT you charged on sales) minus
- Input VAT (VAT you paid on purchases) equals
- VAT to pay (if positive) or VAT to reclaim (if negative)
Making Tax Digital software handles most calculations automatically based on your recorded invoices.
Guv’s take

Claiming a refund? If you reclaim more VAT than you owe (common for businesses with zero-rated sales or high capital expenditure), HMRC usually pays refunds within 10 working days. However, they may verify claims that seem unusual, which can delay payment by 30 days or more.

Ongoing VAT compliance

VAT is not a one-time task - it becomes part of your regular business operations. Once you have completed this learning path, your ongoing obligations are:

Daily: Issue VAT invoices for sales, record purchase invoices with VAT amounts
Quarterly: Submit your VAT return and pay any VAT due (or receive refunds)
Annually: Review whether you qualify for any VAT schemes (Flat Rate, Cash Accounting, Annual Accounting)
Ongoing: Keep all VAT records for 6 years

Next steps after this journey

Once you understand the basics, you may want to explore:

VAT schemes for small businesses

Consider the Flat Rate Scheme, Cash Accounting, or Annual Accounting to simplify your VAT administration

Manage your tax compliance: VAT is just one part of business tax. Explore our tax compliance journey to understand your complete tax obligations including Self Assessment, Corporation Tax, and PAYE.

Quick reference checklist

Use this checklist to confirm you've covered everything:

Calculated your rolling 12-month taxable turnover
Determined whether registration is mandatory or voluntary
Registered for VAT (if required) within 30 days of exceeding threshold
Received your VAT registration certificate and number
Set up Making Tax Digital compatible software
Understand which VAT rate applies to your goods and services
Know how to issue compliant VAT invoices
Understand what input VAT you can reclaim (and what is blocked)
Know your VAT return deadline (1 month and 7 days after period end)
Set up a system for keeping VAT records for 6 years

Understanding VAT from scratch

What you will learn

Do I need to register for VAT?

Check if you need to register for VAT

Register for VAT

How to register for VAT

What happens after registration

Charge VAT on your sales

How to charge VAT correctly

Reclaim VAT on your purchases

Reclaim VAT on business purchases

Key reclaim rules to remember

Submit your VAT returns

How to complete your VAT return

The VAT calculation in brief

Ongoing VAT compliance

Next steps after this journey

VAT schemes for small businesses

Quick reference checklist

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Manage your tax compliance

Approaching the VAT threshold

VAT return deadline checklist

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