that business owners should be aware of.
Whether you’re starting on your journey as a business owner or you’re looking to scale your operations as your business grows, you must understand the compliance obligations, thresholds and key considerations to ensure you avoid any unexpected liabilities and penalties.
In this article, we will guide you through the essential aspects of VAT in 2025, including:
- What is VAT?
- When should you register for VAT?
- What should you charge?
- How to remain compliant
What is VAT?
VAT is simply a tax on goods and services, which is charged at each stage of a supply chain where value is added. VAT is ultimately paid by the consumer at the point at which goods or services are received; however, businesses are responsible for collecting and reporting VAT payments to HMRC.
What is the current rate of VAT?
Currently, there are three rates at which VAT may be charged in the UK:
- Standard rate – 20% – applies to most goods or services
- Reduced rate – 5% – examples include domestic fuel and power
- Zero rate – 0% – examples include most food products and children’s clothing
Some items, such as postage stamps, insurance products and specific education services, are currently exempt from VAT.
Other items, such as employee salaries or statutory fees, exist outside the scope of VAT entirely.
If you are concerned about whether VAT is owed on the goods or services you provide, it is advisable to speak to an accountant, who will be able to provide further information.
When do you need to register for VAT?
There are several thresholds or criteria which trigger the need to register for VAT, and it is essential that business owners are aware of each of these:
You must register for VAT if:
- Your VAT taxable turnover exceeds the 2025/2026 threshold of £90,000 over a rolling 12-month period.
- You expect to exceed this threshold in a single 30-day period.
- You are based outside the UK but supply goods or services to UK customers and meet the relevant criteria.
It is also possible to voluntarily register for VAT if your turnover is below the threshold. This allows you to reclaim VAT on business expenses, but comes with additional administrative requirements and reporting obligations.
How to remain VAT compliant
To avoid unexpected penalties, it is important that you are aware of the requirements to remain VAT compliant. Currently, these requirements are that you:
Register for VAT and keep details updated:
Once you have registered, you will be provided with a VAT number and will be required to submit returns through a Making Tax Digital (MTD)-compliant software. You must maintain your records by informing HMRC of any changes to contact details or company structure.
Charge VAT correctly
It is essential to ensure that all invoices display your VAT number, the correct VAT rate, and the amount of VAT charged. Different rules apply to B2B, B2C and international transactions.
Submit VAT returns on time
VAT returns are filed quarterly. Returns must be submitted one month and seven days from the end of the VAT period.
For example, VAT returns for Quarter 1 (1st January – 31st March) must be paid by May 7th.
Keep Accurate Digital Records
Under the upcoming MTD regulations, which come into effect from April 2026, businesses are required to maintain digital records of all VAT-related transactions using software which integrates with the HMRC systems (for example, QuickBooks or Sage).
It should be noted that under new MTD regulations, it is possible to continue to maintain records through traditional systems, such as Excel or paper-based systems, provided that these records are converted into a compliant format when filing.
Reclaim VAT on business expenses
Typically, VAT can be reclaimed on goods and services used exclusively for business purposes.
Examples include office supplies, computers or business-related transportation costs.
However, if you purchase a computer through the business but intend to use it for personal use, this would not be deemed as exclusively for the business and so cannot be classed as an allowable business expense.
Common VAT Pitfalls and Penalties
In order to avoid unwanted penalties or unexpected liabilities, it is important to be aware of the common pitfalls associated with VAT:
Missing the registration threshold
One of the easiest ways to incur a penalty is to be unaware of your proximity to the registration threshold. Ensure that you monitor your turnover regularly and register on time to avoid late registration penalties. The penalty amount depends on the lateness of the registration, ranging from 5% of the VAT due if registration is less than 9 months late to 10% of the VAT due if registration is over 9 months late.
Incorrect application of VAT rates
Misclassifying your goods or services can lead to VAT being underpaid, overclaimed or simply unpaid. Any one of these can result in a VAT penalty of up to 30% of the potential lost revenue.
Late Submissions or Payments
Making VAT payments late may result in HMRC issuing a surcharge based on the overdue tax and date of payment. Filing returns late may result in a fixed penalty after you have reached the threshold on accrued penalty points which is dependent on how many returns have been filed late during a set period.
Insufficient record-keeping
In the event of an HMRC investigation, inadequate records could result in a fine being incurred.
How can Cooper Associates Accountancy help you?
Accurately maintaining VAT records can be complex, and mistakes can prove costly. Whether you’re looking to register, file returns or are planning for VAT-efficient expansion, our team of experienced, professional accountants are available to help you throughout the entire process.
Get in touch today to discover how Cooper Associates Accountancy can help you to navigate the VAT landscape.
