Everything You Need to Know About UK VAT
Running a business in the UK? Then VAT is something you can’t afford to ignore. Whether you’re a freelancer, limited company, or e-commerce brand, understanding VAT helps you stay compliant — and avoid nasty penalties.
Let’s break down everything you need to know about UK VAT in plain English. No jargon — we promise! (With a helpful example at the end).
What is VAT?
VAT (Value Added Tax) is a tax added to most goods and services sold in the UK.
As a business, you collect VAT from your customers, then send it to HMRC.
You also pay VAT on things you buy, and claim it back when you file.
Think of yourself as the middleman between your customer and HMRC.
UK VAT Rates at a Glance
Standard Rate (20%) – most goods and services.
Reduced Rate (5%) – home energy, children’s car seats.
Zero Rate (0%) – most food, children’s clothing, books.
Exempt – insurance, education, healthcare.
Do You Need to Register for VAT?
You must register if:
Your taxable turnover goes over £90,000 in any 12-month period (2025 threshold).
You expect to go over it in the next 30 days.
You can register voluntarily if you’re under the limit, which is useful if:
You sell B2B (business to business).
You want to reclaim VAT on your expenses.
Deadline: Register within 30 days of crossing the threshold.
How VAT Works – Simple Breakdown
Charge VAT on your sales (output VAT).
Pay VAT on your purchases (input VAT).
File VAT returns (usually quarterly).
Pay the difference to HMRC — or get a refund if you’ve paid more than you collected.
Real-Life VAT Example
You run a design agency:
Invoice to client: £1,000 + 20% VAT = £1,200.
Buy a laptop: £800 + 20% VAT = £960.
At the end of the quarter:
VAT collected on sales = £200.
VAT paid on expenses = £160.
You owe HMRC = £40.
You only pay the £40 difference. If expenses were higher, HMRC would refund you.
How Do You Pay VAT to HMRC?
After you file your VAT return, HMRC confirms what you owe. You can pay via:
Bank transfer (online banking).
Direct Debit.
Accounting software (if supported).
Debit card or BACS.
Deadline: Payment must clear by the 7th of the second month after your VAT period ends.
VAT Returns & Filing Deadlines
Submit your VAT return 1 month + 7 days after your quarter ends.
Pay any VAT owed by the same date.
Keep digital records at all times (Making Tax Digital is mandatory).
Example: Quarter ends 30 June → return and payment due by 7 August.
VAT Schemes to Simplify Things
Flat Rate Scheme – good for small businesses. Pay a fixed % of turnover, less admin.
Cash Accounting Scheme – useful if clients pay late. Only pay VAT once you’ve been paid.
Annual Accounting Scheme – good for stable businesses. File once a year instead of quarterly.
Penalties & Fines – Don’t Get Caught Out
Late Filing:
Each late return = 1 penalty point.
Reaching your limit triggers a £200 fine.
Quarterly returns: 4 points.
Monthly returns: 5 points.
Annual returns: 2 points.
After that, every late return = £200.
Late Payment:
0–15 days late: no fine, but interest charged.
16–30 days late: 3% of VAT owed (from day 15).
Over 30 days late: 3% + another 3% of what’s still unpaid, plus daily interest (currently 10% per year).
Top Tips to Stay VAT Compliant
Use MTD-compliant software (Xero, QuickBooks, etc).
Set calendar reminders for filing and payment deadlines.
Keep all VAT invoices and receipts for 6 years.
Ask an accountant for help if you’re unsure.
Final Thoughts for Founders
VAT may seem like a burden, but once you understand the flow, it becomes just another routine part of your business. Use the right tools, know your deadlines, and remember: VAT money isn’t yours — you’re just passing it on to HMRC.
