UK VAT Guide 2025: HMRC Rules, Registration, Filing & Best Tools

What is VAT in the UK?

Value Added Tax (VAT) is an indirect tax charged on most goods and services supplied in the UK. Businesses collect VAT from customers and pay it to HM Revenue & Customs (HMRC) through regular VAT returns.

Current VAT rates (2025)

1. Standard rate: 20%
2. Reduced rate: 5% (e.g., energy-saving materials, children’s car seats)
3. Zero rate: 0% (e.g., food, children’s clothing, books)

VAT registration threshold (2025)

You must register for VAT if your business meets any of the following HMRC conditions:

1. Your taxable turnover for the last 12 months exceeds £90,000.
2. You expect your taxable turnover to exceed the threshold in the next 30 days.
3. You buy goods from the EU worth more than £85,000 (specific import rules apply).

How to file a VAT return

VAT returns are usually filed quarterly. Each return includes:

1. Output VAT — VAT charged to customers
2. Input VAT — VAT paid on business purchases
3. Total to pay or reclaim — based on the difference

VAT schemes for small businesses

HMRC offers simplified VAT schemes to reduce administrative work:

1. Flat Rate Scheme: Pay a fixed VAT percentage of turnover.
2. Cash Accounting Scheme: Pay VAT only when customers pay you.
3. Annual Accounting Scheme: One VAT return per year with instalments.
4. Margin Scheme: Suitable for second-hand items, art, antiques and similar goods.

Penalties & compliance

Penalties may apply for late registration, late VAT returns, late payments, or failure to follow Making Tax Digital rules. HMRC may also add interest for overdue VAT.

Who needs to pay VAT?

Most UK businesses that meet VAT registration criteria, including:

Practical VAT tips for 2025

1. Track turnover monthly to identify when you near the VAT threshold.
2. Use MTD-compatible tools for digital VAT records and submissions.
3. Set automated reminders for VAT deadlines.
4. Store digital copies of receipts and invoices.
5. Consult a VAT specialist when operations grow more complex.

Conclusion

VAT compliance is easier with the right digital tools and processes. Stay informed about HMRC thresholds, use MTD-compliant software, and file VAT returns on time. Professional VAT support can help reduce errors and save valuable admin time.