VAT accounting: Understand, register and choose the right scheme

Published Tuesday 18 November 2025

Table of contents

• What is VAT accounting?
• When should you register for VAT?
• Choosing a VAT scheme
• Eligibility requirements for VAT schemes
• Choosing the right VAT scheme for your business
• Get the right VAT advice
• VAT accounting is a legal obligation
• Frequently asked questions about VAT accounting
• Start using Xero for free

Key takeaways

• Register for VAT when your taxable turnover exceeds £90,000 in the previous 12 months or you expect to exceed this threshold in the next 30 days, as registration becomes compulsory and must be completed within 30 days of crossing the threshold.

• Choose the VAT scheme that matches your business needs: use standard accounting for complex transactions, cash accounting if customers pay slowly, flat rate scheme for simple admin with low purchase costs, or annual accounting to spread payments and reduce paperwork.

• Maintain digital VAT records using MTD-compliant software since April 2022, as HMRC requires digital record-keeping and can impose penalties for late submission or incorrect VAT accounting.

• Reclaim VAT paid on business expenses when VAT registered, but remember you must charge VAT to customers which increases your prices, though VAT-registered customers can reclaim this VAT themselves.

What is VAT accounting?

VAT (Value Added Tax) is a consumption tax charged on goods and services when value is added during production or sale. HMRC collects this tax from VAT-registered businesses on most UK transactions.

Key points about VAT:

• Applied to most sales: VAT applies to nearly every sale once you're VAT registered
• Customer type doesn't matter: Both business and consumer sales attract VAT
• VAT reclaim available: You can reclaim VAT paid on business expenses when VAT registered
• Some exceptions exist: Sales outside the UK and certain exempt goods/services

When should you register for VAT?

VAT registration becomes compulsory when your taxable turnover exceeds the current threshold. You must monitor this on a rolling 12-month basis, not just at year-end.

Registration triggers:

• Past turnover: Exceeded threshold in previous 12 months
• Future turnover: Expect to exceed £90,000 in the next 30 days
• Timeline: 30 days to register once threshold is crossed
• Effective date: First day of second month after crossing threshold

Registration process:You can register online through HMRC. Check the current VAT threshold as it changes annually.

If your business earns less than the VAT registration threshold, you do not have to register. Many businesses still choose to register voluntarily. In the year ending March 2024, 41% of VAT-registered businesses had income below the registration limit.

Advantages of registering for VAT:

• You can reclaim VAT paid for business purposes:
• Business supplies such as computers, desks, chairs and utilities have VAT applied to them. You'll need to pay VAT on those business supplies at time of purchase, but you can reclaim it from the government when filing your VAT return.
• It looks professional:
• Being VAT registered makes you look more professional to other businesses. It can also hide the fact that your turnover may be lower than the compulsory VAT threshold.

Disadvantages of registering for VAT:

• You'll have to charge more:
• You'll need to add VAT to your prices. It shouldn't make you more expensive than your competitors, though, as most of them will have to do the same. And if you sell to VAT-registered businesses, they'll be able to claim the VAT back.
• You'll have to do more accounting:
• You'll need to pass on the VAT you've charged to the government and submit quarterly VAT returns.

Choosing a VAT scheme

VAT accounting schemes determine how and when you report VAT to HMRC. Once VAT registered, you must track and report:

• Output VAT: VAT charged to customers
• Input VAT: VAT paid on business purchases

Available schemes:

• Standard accounting: Quarterly returns based on invoice dates
• Cash accounting: Report VAT when payments are received/made
• Flat rate scheme: Pay fixed percentage of turnover
• Annual accounting: One annual return with quarterly payments

Standard VAT accounting method

Standard VAT accounting requires detailed records of all sales and purchases, with quarterly VAT returns submitted to HMRC.

Key requirements:

• Digital records: Must use MTD-compliant software since April 2022. The initial rules for MTD for VAT were introduced in April 2019 for businesses with a taxable turnover above £85,000.
• Quarterly returns: Submit every three months based on invoice dates
• Payment/refund: Pay VAT owed or claim refunds for overpayments
• Record keeping: Track all input and output VAT transactions

MTD exemptions are available if using digital systems isn't practical. Apply for an exemption if needed.

Other VAT accounting methods

Alternative VAT schemes offer different reporting and payment methods suited to specific business needs:

1. Annual accounting scheme

Annual accounting reduces admin burden by replacing quarterly returns with one annual submission and estimated quarterly payments.

How it works:

• One annual return: Submit VAT return once per year
• Quarterly payments: Make estimated payments every three months
• Final balance: Pay difference or claim refund after annual return

Benefits:

• Better budgeting: Predictable quarterly payments
• Improved cash flow: Spread payments throughout the year
• Less admin: One return instead of four

Eligibility: Annual turnover must be £1.35 million or less. Learn more about annual accounting.

• Flat rate scheme

You pay a percentage of your total turnover as VAT. The rate depends on your industry. Check the flat VAT rates for different industries. If your business is a 'limited cost business', you may pay a higher rate.

You must still charge VAT on your invoices, but you do not need to record VAT on every purchase. You can use this scheme if your annual turnover is £150,000 or less. This threshold has not changed since 2017. If it had increased with inflation, it would be £196,000 in 2024. Check with HMRC to see if you are eligible.

• Cash accounting scheme

Eligibility requirements for VAT schemes

Each VAT scheme has specific rules about who can join, mostly based on your estimated VAT taxable turnover. It's important to check these before choosing a scheme.

• Standard and Cash Accounting: You can join if your estimated VAT taxable turnover is £1.35 million or less.
• Annual Accounting Scheme: You can join if your estimated VAT taxable turnover is £1.35 million or less.
• Flat Rate Scheme: You can join if your estimated VAT taxable turnover is £150,000 or less.

You must leave a scheme if your turnover exceeds the joining threshold for that scheme. Always check the latest thresholds on the GOV.UK website.

Choosing the right VAT scheme for your business

The best VAT scheme for you depends on your business type and cash flow. Consider these points when making your choice:

• For simpler bookkeeping: The Flat Rate Scheme can reduce your admin, as you pay a fixed percentage of your turnover to HMRC.
• To manage cash flow: The Cash Accounting Scheme lets you pay VAT to HMRC only after your customers have paid you. The Annual Accounting Scheme can also help by allowing you to make advance payments towards your bill.
• If you sell to other VAT-registered businesses: The Standard Scheme is often best, as your customers can reclaim the VAT you charge.

Think about how your business operates and which scheme best fits your financial rhythm. An accountant can provide advice tailored to your specific situation.

Get the right VAT advice

VAT is relatively straightforward but there are some pitfalls. It's a good idea to talk to an accountant to help you choose the best VAT scheme for your situation.

Choosing the right scheme depends on your business characteristics and cash flow needs:

Choose standard accounting if:

• Large business: Annual turnover over £1.35 million
• Complex transactions: Multiple VAT rates or frequent exports
• Good cash flow: Can handle quarterly VAT payments easily

Choose cash accounting if:

• Slow payers: Customers take 30+ days to pay invoices
• Service business: Low purchase costs, high labour content
• Cash flow priority: Want to pay VAT only when paid by customers

Choose flat rate scheme if:

• Simple admin: Want minimal VAT record-keeping
• Low purchase costs: Spend little on VAT-rated supplies
• Predictable costs: Prefer fixed percentage of turnover

Get professional advice:Find an accountant with experience in your industry for personalized guidance.

VAT accounting is a legal obligation

You're required to register for VAT once you pass the registration threshold. And then you're obliged to maintain your VAT accounting records. From April 2022, you must keep your records digitally, either in compliant software or a spreadsheet.

HMRC can fine you if you do not account for VAT correctly. New penalties for late submission and payment apply for VAT periods starting on or after 1 January 2023. File accurate and timely returns to avoid penalties.

An accountant can help keep you compliant, while software can automate data capture and reporting. Together, they'll streamline your tax filing. VAT accounting may be an obligation, but it doesn't have to be a chore.

Frequently asked questions about VAT accounting

Here are answers to some common questions about VAT accounting.

What is VAT in accounting?

Value Added Tax (VAT) is a tax placed on most goods and services sold by VAT-registered businesses. In accounting, it involves tracking the VAT you charge customers (output VAT) and the VAT you pay on business purchases (input VAT). The difference is then paid to or reclaimed from HMRC.

How does VAT accounting work?

VAT accounting works by recording the VAT on your sales and purchases. At the end of your VAT period, you add up all the VAT you've charged and subtract the VAT you've paid. If you've charged more than you've paid, you pay the difference to HMRC. If you've paid more, you can reclaim the difference.

What is standard accounting for VAT?

Standard VAT accounting, also known as invoice accounting, is when you record and pay VAT based on the dates on your invoices, not when the money is actually paid. This means you might have to pay VAT to HMRC before your customer has paid you.