Thinking about VAT as a small business

It is important for businesses to understand the VAT basics to ensure compliance with tax laws, correctly price products and services, and manage cashflow. Below is a summary of the principal rules governing VAT and VAT registration as a small business.

The basics

VAT is a tax on the supply of goods and services, collected by the seller and passed on to HMRC. The seller can also recover any VAT that they have had to pay in delivering that good or service.

Making Tax Digital (MTD)

The Making Tax Digital for VAT regime requires you to maintain business records digitally for VAT purposes in what is known as ‘functional compatible software’, and to file your VAT returns using digital methods. This means that some kind of electronic record keeping system must be used.

VAT registration

Businesses must register for VAT if their total VATable turnover reaches or exceeds the £85,000 (£90,000 after 1 April 2024) threshold within a rolling 12-month period, or if the business is likely to pass the threshold within the next 30 days.  It is possible for businesses to register for VAT voluntarily even if their turnover is below the threshold; this can be beneficial in certain circumstances, for instance where the business will often be in a VAT refund position.


Once registered, the business must fulfil new responsibilities:

Author, Stephen Callaghan
  • the business must charge VAT on most products and services;
  • the business must submit VAT returns on a regular basis;
  • the business must pay any VAT owed to HMRC;
  • the business must keep detailed VAT records on MTD compatible software.

VAT accounting schemes

The following VAT accounting schemes are available to many small businesses as alternatives to accrual accounting where the VAT is accounted for when invoices are issued and received.

  • Cash accounting – VAT is accounted for when the payment is received from the customer, rather than when invoices are issued. This can improve cashflow, as the VAT is not payable until the business has received the money. This scheme is available for businesses with a VAT turnover of up to £1.35m.
  • Flat rate scheme – businesses pay a fixed rate of VAT, the rate dependent on the type of business. To join this scheme the business’ VAT turnover must be £150,000 or less, the business must apply to HMRC.
  • Annual accounting scheme – businesses with an annual turnover under £1.35m are allowed to submit one VAT return per year rather than four. The scheme requires businesses to make advance payments based on their estimated VAT liability, with a final balancing payment due two months after the end of the VAT year.

How we can help

Our expertise and knowledge can help support your business, saving you time and stress managing your VAT obligations and ensuring your business complies with MTD for VAT. We can provide advice to ensure you are applying the correct rates of VAT and can offer guidance on which VAT scheme to choose to optimise cashflow and reduce tax liabilities.

If you have any questions about VAT, please get in touch with your usual Ryecroft Glenton contact.

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