VAT for small business owners

What you need to know

VAT has a reputation for being complicated, and we understand why. It touches your pricing, your cash flow and your paperwork all at once, and getting it wrong can be an expensive mistake.

When you need to register

You must register for VAT once your VAT taxable turnover for any rolling 12-month period goes over £90,000. This isn't your tax year or your accounting year, it's a rolling total, so it's worth checking your turnover regularly rather than only at year end, especially if you're growing quickly or have a seasonal spike.

You can also register voluntarily before you hit that threshold. This makes sense for some businesses and not others, which we'll come back to below.

What being VAT registered means

Once registered, you charge VAT on the goods or services you sell, usually at the standard rate of 20 percent, though some goods and services are reduced rate, zero-rated or exempt. You then reclaim the VAT you've paid on your own business purchases. The difference between what you've charged and what you've reclaimed is what you pay to, or sometimes reclaim from, HMRC.

Most businesses submit VAT returns quarterly, though monthly and annual schemes exist too. Since 2022, every VAT-registered business has had to keep digital records and submit returns through Making Tax Digital-compatible software rather than typing figures directly into HMRC's portal.

Choosing a VAT scheme

There's more than one way to work out your VAT, and the right one depends on your business. The standard scheme calculates VAT on every sale and purchase as it happens. The flat rate scheme lets some smaller businesses pay a fixed percentage of turnover instead, which can simplify the admin but isn't always the cheaper option. Cash accounting schemes let you account for VAT when money changes hands rather than when you invoice, which can help cash flow if your customers are slow to pay. None of these is automatically “best”, it depends on what your business looks like.

The cash flow trap

One of the most common mistakes we see is business owners treating VAT they've collected as their own money. If a customer pays you £1,200 including VAT, £200 of that was never yours, it belongs to HMRC. Spend it, and you can end up short when your return is due. The simplest fix is to set aside the VAT element of what you're paid, either mentally or in a separate account, so the money's there when you need to pay it over.

Should you register before you must?

Voluntary registration can work in your favour if most of your customers are VAT-registered businesses themselves, since they can reclaim the VAT, you charge them and it costs them nothing extra. It also lets you reclaim VAT on your own costs, which matters more if you have significant setup expenses or buy a lot of stock or equipment.

On the other hand, if your customers are mainly individuals or non-VAT-registered businesses, registering means either absorbing the VAT yourself, which cuts your margin, or adding it to your prices, which can make you look more expensive than a non-registered competitor. There's no universally right answer, it depends on who you sell to.

Common mistakes to avoid

Missing deadlines is the obvious one, but there are subtler errors too. Charging the wrong VAT rate, forgetting to account for VAT on expenses like fuel or subscriptions, and not reconciling your VAT account against your bookkeeping are all things we see regularly. Reverse charge rules on certain services, and VAT on transactions with businesses outside the UK, catch people out too, since the rules aren't always intuitive.

Getting it right

Good VAT compliance mostly comes down to good bookkeeping. If your records are accurate and up to date throughout the quarter, your VAT return is largely just a summary of work already done, rather than a rush job at deadline time. Cloud accounting software makes this far more manageable than it used to be, calculating the VAT on each transaction as you go rather than leaving it all to the end.

If you're approaching the threshold, or you're unsure whether voluntary registration would help or hurt your business, it's worth working through the numbers properly rather than guessing. It's a decision that's genuinely different for every business.

The information contained herein is provided for information purposes only; the contents are not intended to amount to advice and you should not rely on any of the contents herein. We disclaim, to the full extent permissible by law, all liability and responsibility arising from any reliance placed on any of the contents herein.

Feeling unsure about VAT and what it means for your business? Book a free, no obligation chat and we'll help you work out what applies to you.