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VAT for Small Business Owners: What You Actually Need to Know About VAT Registration

  • Writer: Tyler Trew
    Tyler Trew
  • Jun 13
  • 3 min read

Updated: Jun 13

VAT. It’s one of those things that gets mentioned a lot — but no one really sits down and explains it without sounding like a tax textbook.

So, let’s break it down simply, without the jargon, and help you figure out what route (if any) you need to take.



What Is VAT & VAT Registration

VAT stands for Value Added Tax — a tax added to most goods and services sold in the UK. If you’re VAT registered, you collect VAT from your customers, then pay it to HMRC (minus any VAT you’ve paid on your own business expenses).


VAT Registration : You can be a Sole Trader or Limited Company and register for VAT, you need to register when your taxable turnover reaches the threshold.


Right now, the VAT threshold is £90,000 (from 1 April 2024). If your taxable turnover goes over this in any 12-month rolling period, you must register.

But even if you're under, you can choose to register voluntarily.



Why Register for VAT Voluntarily?

Here’s why some small business owners do it even before they hit the threshold:

  • It makes you look more established

  • You can reclaim VAT on business expenses

  • If you mainly work with VAT-registered businesses, it doesn’t affect your pricing competitiveness

But: if most of your clients are consumers who can’t claim VAT back, it could make you look more expensive.


Types of VAT Schemes: Which One's for You?

There are a few different ways you can register and manage your VAT — here’s a breakdown of the most common options:



1. Standard VAT Scheme (aka “normal VAT”)

How it works: You charge VAT (usually 20%) on your sales, and you reclaim VAT on your purchases.

When to consider:

  • You have a lot of business expenses

  • Your admin is all up to date and you don’t mind regular calculations

  • You want full control over what you reclaim

Returns: Usually quarterly, showing VAT in and out.


2. Flat Rate Scheme (FRS)

How it works: You still charge VAT at 20% to your customers, but instead of reclaiming VAT on every little thing, you pay a fixed percentage of your turnover to HMRC. The percentage depends on your industry.

For example: if you're in a service-based business, your flat rate might be around 14.5% – meaning that you keep the difference between the 20% you charge and the 14.5% you pay.

Bonus: In your first year, you get a 1% discount.

When to consider:

  • You have low business expenses

  • You want less admin (no need to track VAT on every purchase)

  • You want a predictable payment structure

Heads up: If you’re classed as a limited cost trader (i.e. you don’t buy many goods), you’ll be hit with a flat rate of 16.5% — so you would need to consider if Flat Rate is your best option.


3. Cash Accounting Scheme

How it works:You only pay VAT when you’ve been paid by your customers — not when you invoice them.

When to consider:

  • You have slow-paying customers

  • You want to improve cash flow


4. Annual Accounting Scheme

How it works: You only submit one VAT return per year, but make advance payments towards your VAT bill.

When to consider:

  • You want to keep admin to a minimum

  • You’re good at budgeting and like the idea of spreading VAT payments


So, Which VAT Scheme Is Best?

It depends on how your business works:

  • Service-based, low expenses? Flat Rate might save you time and money.

  • Big spend on equipment or stock? Standard VAT gives more flexibility to reclaim.

  • Struggling with cash flow? Cash Accounting could give you breathing space.


— Quick Cheat Sheet

Scheme

Good for...

Admin level

Reclaim VAT?

Standard VAT

Businesses with high expenses

High

Yes

Flat Rate Scheme

Simpler process, low expenses

Low

Not usually*

Cash Accounting

Businesses with late-paying clients

Medium

Yes

Annual Accounting

Minimal admin, steady payments

Low

Yes

*You can reclaim VAT on capital purchases over £2,000 under the flat rate scheme.


Final Thoughts

VAT doesn’t need to be scary — but choosing the right scheme can save you time, money, and a lot of headaches. There is a lot to consider so make sure you reach out to someone who can explain each scheme and the benefits to your business.


You can reach out to us at Highlight if you have any questions.

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