What is VAT, and do I need to register my limited company?

Almost every consumer in Britain pays it, and it’s a staple talking point during the Chancellor’s annual Budget. But what exactly is VAT, and do you need to register your limited company for it?

What is VAT?

As consumers, we’re most likely to encounter VAT when we hit the shops. But as a limited company owner, there’s much more to think about.

VAT is a registration-based tax, which means you’re only allowed to charge it if your business is signed up to the scheme. Most goods and services sold by UK businesses are subject to VAT unless specifically zero-rated or exempt.

VAT can also apply when you sell business assets or make certain other supplies.

One of the main advantages of being VAT-registered is that you can usually reclaim VAT that your business pays on qualifying business purchases, subject to the normal VAT rules.

VAT rates in brief

There are three main VAT rates in the UK:

• Standard rate (20%) – applies to most goods and services
• Reduced rate (5%) – applies to certain items such as domestic fuel and power
• Zero rate (0%) – applies to items such as most food, books, and children’s clothing

Some supplies are VAT-exempt, meaning no VAT is charged, and VAT on related costs is usually not reclaimable.

What VAT schemes are available?

VAT can be confusing, particularly if you’re registering for the first time. One reason is the number of different VAT accounting schemes available.

Rather than simply adding up VAT charged and subtracting VAT paid, you can choose from several schemes with different reporting and payment rules, subject to their individual eligibility requirements.

For example, the VAT Flat Rate Scheme allows you to pay a fixed percentage of your gross turnover to HMRC. The percentage depends on your industry sector.

This scheme was designed to simplify VAT administration for small businesses. However, since April 2017, businesses classed as limited cost traders must use a higher flat rate of 16.5%, which has removed much of the financial benefit for companies with low expenses.

If you prefer not to submit quarterly VAT returns, the Annual Accounting Scheme allows eligible businesses to submit one VAT return per year, with interim payments based on your previous bill.

If your customers take a long time to pay, the Cash Accounting Scheme may help with cash flow. Under this scheme, eligible businesses only pay VAT to HMRC once the customer has paid, rather than when the invoice is issued.

This is a popular option for many small companies.

Retail businesses may also benefit from one of the VAT retail schemes, which allow VAT to be calculated once per return rather than on each individual sale.

If you’re unsure which scheme is best for your business, speaking to an accountant can help you avoid costly mistakes.

How to register your company for VAT

You can register for VAT online via the HMRC VAT registration service. In practice, many companies ask their accountant to handle this process for them.

Once registered, you’ll receive a VAT number, which must be shown on VAT invoices and other VAT documents where required.

During registration, you’ll be asked to provide details such as your company’s turnover, business activities, and bank account information.

Making Tax Digital (MTD) for VAT applies to VAT-registered businesses. You must keep certain VAT records digitally and submit your VAT returns using compatible software.

When VAT registration is compulsory

You must register for VAT if your total VAT-taxable turnover exceeds £90,000 in any rolling 12-month period, or if you expect your turnover to exceed this threshold in the next 30 days alone.

VAT-taxable turnover includes supplies that are standard-rated, reduced-rated and zero-rated. It does not generally include VAT-exempt supplies.

This threshold remains unchanged for the 2026/27 tax year.

You can also register voluntarily if your turnover is below the threshold. Some businesses do this to reclaim VAT on costs, or because being VAT-registered is expected in their industry.

Buying goods from overseas

Following Brexit, the old EU acquisition thresholds no longer apply to most UK businesses. VAT on goods imported from the EU is now generally handled as import VAT, in the same way as goods imported from the rest of the world.

Different rules apply in Northern Ireland, which continues to follow certain EU VAT arrangements for goods.

How to cancel your VAT registration

There may be situations where you no longer want, or need, to be VAT-registered.

You can voluntarily cancel your VAT registration if your taxable turnover falls below the current deregistration threshold of £88,000.

You must also cancel your registration if your company stops trading or otherwise ceases to be eligible or required to remain VAT-registered.

VAT deregistration is usually done online, although Form VAT7 can still be used in certain cases. Further guidance is available on the HMRC website.