Value Added Tax (VAT) is a consumption tax charged on most goods and services in the UK. Businesses act as collectors of VAT on behalf of HM Revenue & Customs, making it a key compliance and cash flow consideration.

What is VAT?

VAT is added to the sale of goods and services by VAT registered businesses. The key principles are:

  • Output VAT – VAT charged on sales
  • Input VAT – VAT paid on purchases
  • The difference between the two is paid to (or reclaimed from) HMRC

VAT is ultimately borne by the end consumer, not the business if VAT registered.

Who does it apply to?

You must register for VAT if:

  • Your taxable turnover exceeds £90,000 in a rolling 12‑month period
  • You expect to exceed this threshold in the next 30 days

You can also voluntarily register below this level, which may be beneficial depending on your business model.

Key Dates

  • VAT registration must take place within 30 days of the end of the month in which taxable turnover exceeded £90,000 in the past 12‑month rolling period. Immediate registration is required if the threshold is expected to be met in the next 30 days alone.
  • VAT returns are usually quarterly, this does not need to be calendar quarters.
  • It can be opted to prepare monthly returns, often useful for those that find themselves in a refund situation.
  • Payment is due 1 month and 7 days after the end of the VAT period

VAT Rates

The main UK VAT rates are:

Rate Type Rate Applies to
Standard Rate 20% Most goods and services within the UK.
Reduced Rate 5% Certain items (e.g. domestic energy).
Zero Rate 0% Essentials such as most food (not hot) and children’s clothing.

Some supplies are exempt from VAT (e.g. financial services, education), meaning no VAT is charged but input VAT recovery may be restricted.

Tax Planning Considerations

  • Choosing the right VAT scheme – Schemes such as the Flat Rate Scheme, Cash Accounting Scheme, or Annual Accounting Scheme can simplify reporting and improve cash flow.
  • Timing of registration – Registering too late can lead to penalties, but registering early may allow recovery of input VAT on start‑up costs.
  • Pricing strategy – Consider whether your customers can recover VAT — this impacts whether VAT is a real cost or simply a pass‑through.
  • Partial exemption – Businesses making both taxable and exempt supplies need to carefully manage input VAT recovery.
  • Cash flow management – VAT collected is not business income — setting funds aside avoids shortfalls when payments fall due.
  • International trade – Cross‑border transactions introduce additional complexity, including import VAT, exports, and place of supply rules.

Cube Partners Tip 💡

VAT is often seen as administrative, but the choice of scheme and timing of decisions can have a real impact on cash flow. Getting this right early can save both time and money.