If your company’s taxable turnover goes above £90,000 in a 12-month period (the 2025/26 threshold), you must register for VAT.
Even if you are below the limit, you can choose to register voluntarily.
VAT affects how you invoice clients, how you reclaim costs, and the administrative work you need to complete each quarter.
Different schemes exist to simplify the process, including the Flat Rate Scheme, which has been popular with contractors and consultants in the past.
This guide explains what VAT is, when you must register, the schemes available, and the pros and cons of using the Flat Rate Scheme.
What’s in this guide?
What is VAT?
As consumers, we see VAT added to most everyday goods and services. For companies, it works differently. VAT is a registration-based tax, which means you can only charge it once your business is registered with HMRC.
Most sales of goods and services are liable for VAT. If your company is VAT-registered, you must charge VAT to your customers, but you can also reclaim VAT paid on purchases from other businesses. This system is known as the standard VAT scheme.
When do you need to register?
It’s compulsory to register if your company’s VAT-taxable turnover goes over £90,000 in a rolling 12-month period, or if you expect it will exceed that figure in the next 30 days alone. Check the current thresholds on GOV.UK.
You can also register voluntarily, even if you are under the threshold. Reasons to do this include:
- Being able to reclaim input VAT on purchases.
- Looking more professional, for example if you work with large organisations that expect suppliers to be VAT-registered.
Registration is simple – you can complete it online via HMRC (the page has details of the information you’ll need to have ready), or your accountant can do it on your behalf.
What VAT schemes are available?
VAT is not a one-size-fits-all system. HMRC offers several schemes, designed for different trading patterns:
- Standard scheme – the default system used by the vast majority of firms. You charge VAT on your sales and reclaim VAT on eligible purchases.
- Flat Rate Scheme (FRS) – you pay a fixed percentage of your turnover to HMRC instead of reclaiming VAT on most purchases. This aims to simplify administration for small firms. FRS guidance.
- Annual Accounting Scheme – instead of four VAT returns a year, you submit one annual return and make advance payments. Annual Accounting overview.
- Cash Accounting Scheme – you only pay VAT once you receive payment from customers, rather than when you issue invoices. Cash Accounting overview.
- Retail schemes – designed for retailers who handle large volumes of small sales, simplifying your VAT calculations.
If you’re not sure which scheme is right for your company, it’s a good idea to ask your accountant. They will look at your turnover, expenses, and industry type before recommending the best option.
The Flat Rate VAT Scheme explained
The Flat Rate Scheme was introduced to simplify VAT for small businesses. Instead of working out the difference between VAT charged on sales and VAT paid on purchases, you pay HMRC a fixed percentage of your turnover.
Your flat rate depends on your industry type. For example:
- Advertising – 11%
- Computer and IT consultancy – 14.5%
- Financial services – 13.5%
- Management consultancy – 14%
- Publishing – 11%
If you are in your first year of VAT registration, you can reduce the flat rate by 1%.
A simple example
- A management consultant invoices a client £500 + VAT (20%) = £600.
- Their flat rate is 14%.
- They must pay 14% of £500, which is £70, to HMRC.
The Flat Rate Scheme can reduce paperwork, but you give up the right to reclaim VAT on most purchases. One exception is capital assets costing over £2,000, where VAT can still be reclaimed.
To join the FRS, your VAT-inclusive turnover must be £150,000 or less – find out more from HMRC.
Limited cost trader rules
Since April 2017, the tax advantages of the FRS have been restricted. HMRC introduced a higher flat rate of 16.5% for businesses classified as a limited cost business. See VAT Notice 733.
You are a limited cost trader if you spend:
- Less than 2% of your VAT-inclusive turnover on goods each year, or
- Less than £1,000 a year on goods if 2% is lower.
Goods must be used exclusively for business, but some items are excluded, such as capital expenditure, food and drink for employees, and vehicles and fuel unless you run a transport business.
For many service companies with minimal expenses, the 16.5% rate often results in paying more VAT than under the standard scheme.
Eligibility and restrictions
You can usually join the Flat Rate Scheme if:
- Your VAT-taxable turnover is £150,000 or less.
- You are not closely linked to another business.
- You haven’t left the scheme in the last 12 months.
- You haven’t committed VAT offences in the past year.
Because the scheme rules are complex, and the limited cost trader test can make a big difference, it’s worth speaking to your accountant before applying.
If you need help choosing an adviser, see our guide to finding a limited company accountant.
VAT returns and Making Tax Digital
Once you are VAT-registered, you will need to submit VAT returns to HMRC, typically every quarter.
A return sets out the VAT you have charged on your sales and what you owe, taking into account your chosen scheme.
Since 2019, all VAT returns have been subject to the Making Tax Digital (MTD) rules. This means you must keep digital VAT records and use compatible software to file each return.
HMRC provides a list of recognised software providers, and all mainstream accounting packages (such as Xero and FreeAgent) are MTD-compatible.
In practice, most limited company directors will get their accountant to prepare and submit VAT returns. This ensures the figures are correct and deadlines are not missed.
Cancelling VAT registration
There may come a point where you no longer want, or need, your company to be VAT registered.
You can choose to cancel your registration if your taxable turnover falls below the deregistration threshold of £88,000. You must also cancel if you stop trading or close your company.
To cancel your registration online, visit this page on GOV.UK.
