Understanding VAT: A Simple Guide for UK Businesses

Published on June 18, 2025 by Inc Multiservice ltd

Value Added Tax (VAT) is a tax applied to most goods and services sold by VAT-registered businesses in the UK. For many business owners, it can seem complex. This guide breaks down the basics.

What is VAT?

In simple terms, VAT-registered businesses add VAT to the price they charge for their goods or services. They can then generally reclaim the VAT they have paid on business-related purchases. The business acts as a tax collector for HMRC, paying the difference over to them.

When Do You Need to Register for VAT?

You must register for VAT if your business's VAT-taxable turnover was more than the registration threshold (currently £90,000 as of April 2024) in the last 12 months. You can also choose to register voluntarily if your turnover is below this amount, which can be beneficial if you mainly sell to other VAT-registered businesses.

How Does It Work in Practice?

The process involves two key components:

• Output Tax: This is the VAT you charge on your own sales.
• Input Tax: This is the VAT you pay on your business purchases.

Periodically (usually every three months), you complete a VAT Return. On this return, you add up all your output tax and subtract all your input tax. If the output tax is greater, you pay the difference to HMRC. If the input tax is greater, you can reclaim the difference from HMRC.

Different VAT Schemes

While most businesses use standard VAT accounting, HMRC offers several schemes that can simplify the process for small businesses, including:

• Cash Accounting Scheme: You account for VAT based on when money is actually received and paid out, rather than on invoice dates.
• Flat Rate Scheme: You pay a fixed percentage of your turnover to HMRC. You can't reclaim input tax on purchases, but the process is much simpler.

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