What Is VAT and Do I Need to Register?
Everything UK founders need to know about VAT, what it is, the £90,000 threshold, how to register, and whether voluntary registration makes sense.
VAT (Value Added Tax) is a consumption tax charged on most goods and services in the UK. You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period. But VAT registration isn't just a compliance obligation, for some businesses, registering voluntarily before you hit the threshold makes commercial and financial sense. This guide explains how VAT works, when you need to register, and what registration actually involves.
What is VAT?
Value Added Tax (VAT) is a tax charged at each stage of production and sale of goods and services in the UK. The standard rate is 20%, though some goods and services are charged at a reduced rate of 5% or zero-rated (0%).
As a VAT-registered business, you:
Charge VAT to your customers on your taxable sales (output VAT)
Pay VAT on your purchases from VAT-registered suppliers (input VAT)
Submit the difference to HMRC: if your output VAT exceeds your input VAT, you pay the difference; if input exceeds output, HMRC repays you
VAT is ultimately paid by the end consumer, businesses collect it on HMRC's behalf.
VAT rates in the UK (2025/26)
Rate | Percentage | Applies to |
Standard rate | 20% | Most goods and services |
Reduced rate | 5% | Home energy, children's car seats, some health products |
Zero rate | 0% | Most food, children's clothing, books, newspapers |
Exempt | N/A | Insurance, financial services, health, education (cannot reclaim VAT on costs) |
When do you have to register for VAT?
You must register for VAT when your taxable turnover exceeds £90,000 in any rolling 12-month period. This is the mandatory registration threshold for 2025/26.
Important: The threshold is based on your rolling 12-month turnover, not your financial year. You must monitor this continuously. If you exceed £90,000 in any 12-month window, you must register within 30 days of the end of the month in which you crossed the threshold. HMRC will charge VAT on sales you should have been collecting from the registration date, even if you didn't charge customers VAT at the time.
Should you register for VAT?
You can register for VAT even if your turnover is below £90,000. Whether you should depends on your situation.
When voluntary registration makes sense
Most of your customers are VAT-registered businesses: They can reclaim the VAT you charge them, so the cost to them is neutral. You, meanwhile, can reclaim VAT on your own purchases, which improves your margins.
You're making significant capital purchases: If you're buying equipment, technology, or other high-cost items for the business, reclaiming the 20% VAT on those purchases can be substantial.
You want to appear more established: Some businesses and procurement teams take VAT registration as a signal of scale and legitimacy.
When voluntary registration doesn't make sense
Your customers are mostly consumers (B2C): Individual customers cannot reclaim VAT, so adding 20% to your prices makes you less competitive.
You're early-stage with minimal expenses: If you don't have significant purchases to reclaim VAT on, the compliance burden (quarterly VAT returns) outweighs the benefit.
Your margins are already tight: Adding the administrative complexity of VAT when you're not required to may not be worth it yet.
How to register for VAT
VAT registration is done online through HMRC's Government Gateway. You'll need:
Your business details (name, address, contact information)
Your company registration number (for limited companies)
Your UTR (Unique Taxpayer Reference)
The date you need to register from
Details of your business activities and expected turnover
Your bank details (for any VAT repayments from HMRC)
HMRC will issue a VAT registration number (nine digits, prefixed with GB) and a VAT certificate within 10–30 working days. You must begin charging VAT to customers from your effective date of registration, even if you haven't received your certificate yet.
VAT accounting schemes
There are several VAT accounting schemes that may simplify your VAT administration or improve cashflow:
Standard VAT
You charge VAT on your sales invoices and reclaim VAT on your purchase invoices. You submit quarterly VAT returns showing the difference.
Flat Rate Scheme
Available to businesses with taxable turnover below £150,000. Instead of calculating VAT on each transaction, you pay a flat percentage of your gross turnover to HMRC. The percentage varies by industry (from 4% to 14.5%). Can be simpler and sometimes more profitable than standard VAT.
Cash Accounting Scheme
Available if your taxable turnover is below £1.35 million. You account for VAT when you're paid (not when you invoice), which improves cashflow, particularly useful if you have slow-paying clients.
Annual Accounting Scheme
File one VAT return per year instead of quarterly, making advance payments throughout the year based on your previous return. Reduces admin but requires discipline with cash flow management.
Making Tax Digital for VAT
Since April 2022, all VAT-registered businesses have been required to use Making Tax Digital (MTD)-compatible software to keep their VAT records and submit their VAT returns. This means standard spreadsheet submissions are no longer acceptable, you must use software that connects directly to HMRC's systems. Popular MTD-compatible options include Xero, QuickBooks, FreeAgent, and Sage.