VAT

By understanding VAT rules and schemes, businesses can remain compliant while maximising opportunities to save costs. If you need assistance with VAT registration, filing, or planning, we’re here to help.

Simplifying compliance and saving on VAT

Value Added Tax (VAT) is a consumption tax charged on the sale of goods and services. Compliance is essential for businesses registered for VAT, and proper planning can help minimise costs and improve cashflow.

VAT registration thresholds

For the 2025/26 tax year:

• Registration threshold: Businesses must register for VAT if their taxable turnover exceeds £90,000 in any 12-month period or is expected to exceed this amount in the next 30 days alone.
• Deregistration threshold: Businesses can voluntarily deregister if their turnover falls below £88,000 over 12 months.

Voluntary registration is an option for businesses below the threshold, particularly if they have significant input VAT to reclaim.

VAT rates

• Standard rate: 20% (applies to most goods and services).
• Reduced rate: 5% (applies to certain goods and services, such as energy-saving materials).
• Zero rate: 0% (applies to specific items like most cold food, children’s clothing, and books).

Some goods and services are exempt or outside the scope of VAT, but these do not allow input VAT recovery.

Making Tax Digital (MTD) for VAT

Regardless of turnover, all VAT-registered businesses must comply with Making Tax Digital (MTD) rules. This includes:

• Keeping digital VAT records.
• Submitting VAT returns via MTD-compatible software.

From January 2023, HMRC implemented stricter penalties for late submissions under a points-based system.

VAT schemes

Simplify VAT accounting and potentially save money using these schemes:

• Flat Rate Scheme: Designed for businesses with a VAT-exclusive turnover of £150,000 or less. Participants pay a fixed percentage of their turnover as VAT, which can simplify record-keeping. However, once turnover exceeds £230,000 (including VAT), businesses must exit the scheme.
• Cash Accounting Scheme: Suitable for businesses with a VAT-exclusive turnover up to £1.35 million. Under this scheme, VAT is accounted for only when payment is actually made or received, aiding in cashflow management. Exiting the scheme is required if turnover surpasses £1.6 million (VAT exclusive).
• Annual Accounting Scheme: Allows businesses with a VAT-exclusive turnover of £1.35 million or less to file a single annual VAT return instead of quarterly ones, accompanied by advance instalment payments. Departure from the scheme is necessary if turnover exceeds £1.6 million (VAT exclusive).

Each scheme offers distinct advantages and considerations. Consulting with a tax professional can help determine the most suitable option for your business.

Key considerations

Reclaiming VAT:

• Ensure you are reclaiming VAT only on allowable expenses. For example, VAT on cars is generally only reclaimable if the vehicle is used exclusively for business purposes.
• Check eligibility for VAT bad debt relief if customers fail to pay within six months.

Private use adjustments:

• Adjust input VAT claims to reflect the business portion only for assets used partly for personal use.

Pre-registration expenses:

• If you are newly registered, you can reclaim VAT on goods purchased in the four years prior to registration, provided they are still used in the business, and services purchased in the six months prior to registration.

VAT on property:

• VAT rules for property transactions can be complex. Seek advice for decisions involving commercial or residential property, as they may attract VAT or require an option to tax.

Export and import rules:

• Ensure compliance with post-Brexit VAT rules for international trade, including applying the correct rates and procedures for exports and imports.