VAT regulations can overwhelm even experienced business owners, with complex rules around registration thresholds, reclaim eligibility and scheme selection creating genuine confusion. That’s precisely why we’ve created this comprehensive guide to demystify the process.
The fundamentals of VAT
VAT operates as a consumption tax, meaning the end consumer ultimately bears the cost, and businesses act as intermediaries in this process. When you sell goods or services, you add VAT to the price and collect it from customers. Simultaneously, when purchasing from other VAT-registered businesses, you pay VAT that can be reclaimed.
This system ensures you only remit the difference between VAT collected and VAT paid, effectively taxing the value you’ve added to goods or services. The calculation hinges on your turnover rather than profit margins, making it essential to monitor sales figures regardless of your business’s profitability.
Registration requirements and thresholds
Mandatory VAT registration becomes necessary once your taxable turnover reaches £90,000 within any rolling 12-month period. This threshold applies to the 2025/26 tax year and covers all standard-rated, reduced-rate and zero-rated sales.
Voluntary registration remains an option for businesses below this threshold, particularly beneficial if you regularly work with VAT-registered clients or wish to reclaim VAT on business purchases. However, registration brings administrative obligations, including regular returns and VAT charges on all taxable sales.
Taxable turnover encompasses everything you sell except VAT-exempt items such as certain financial or health services and sales outside UK VAT scope. Whether operating as a sole trader or limited company makes no difference – registration depends solely on turnover levels.
VAT rates and customer changes
Three main VAT rates apply to different goods and services:
- 20% standard rate covers most transactions
- 5% reduced rate applies to specific items like energy-saving products and children’s car seats
- 0% rate covers books, children’s clothing and most food items
Your invoices must clearly display your VAT number, the applicable rate and whether prices include or exclude VAT. Even zero-rated items require reporting on VAT returns.
Payment schedules and methods
VAT returns typically occur quarterly, with submissions due one calendar month and seven days after each quarter ends. You can choose between accrual accounting (recording VAT on invoice dates) or cash basis accounting (recording VAT when payments are actually made or received).
Reclaiming business VAT
VAT-registered businesses can reclaim VAT on most business purchases, including tools, stock, professional services and software subscriptions. However, restrictions apply to client entertainment, personal use items and purchases without valid VAT invoices.
Since April 2022, Making Tax Digital requirements mandate digital record-keeping and MTD-compliant software for VAT return submissions. This system reduces administrative errors whilst providing better visibility of your VAT position.
Alternative VAT schemes
Beyond the standard scheme, several alternatives may suit different business models:
The Flat Rate VAT Scheme allows businesses with turnover under £150,000 to pay a fixed percentage of total turnover rather than tracking individual VAT transactions. Whilst simpler to manage, you cannot reclaim VAT on most purchases.
Cash Accounting Schemes only account for VAT when money changes hands, improving cash flow management but requiring payment to suppliers before VAT reclaims.
Annual Accounting Schemes permit one yearly return instead of quarterly submissions with advance payments throughout the year. This option suits businesses with turnover below £1.35 million.
How we can help
Managing VAT obligations effectively requires specialist knowledge that many business owners simply don’t have time to develop. From understanding complex reclaim rules to navigating registration requirements, the stakes are too high for guesswork.
EKW Group’s comprehensive VAT services include:
- VAT registration and deregistration
- Preparation and filing of VAT returns
- Advice on VAT schemes
- VAT compliance
Get in touch with our experts today for more information.
