Helpsheet 5: VAT – a kind of sales tax

Last Updated on 29 June 2026

Value Added Tax is a tax on the sale of goods and services. It kicks in when the seller is VAT registered, depending on the item being sold. This applies to sole traders too.

A VAT-registered business is effectively a tax collector working for HMRC.

The standard rate is 20%. (Some items attract a lower rate of VAT. Some are exempt.)

You have to register for VAT if your turnover (as opposed to profit) is more than £90,000 in any twelve month period. (This figure usually changes every year on 1st April, although it’s not been changed for a few years.)

You can usually register voluntarily if your turnover is lower than the compulsory threshold.

You can de-register again if your turnover across a year goes below £88,000.

Registration for VAT is simple and free, though in recent years it’s been taking a few months for VAT numbers to be issued. Voluntary registration is normally approved when you get your first income, even if you apply earlier.

Advantages of being VAT registered:

• Kudos and credibility – you look like a proper business
• You can claim some VAT on capital items (kit and hardware) bought up to four years BEFORE you registered (and up to six months for services you’ve bought).
• VAT can be re-claimed on business expenses and equipment once registered, including motor expenses (at various rates)
• There are some simplified VAT systems which might work for some small businesses

Disadvantages of being VAT registered:

• You’ll be more expensive to people who are not registered for VAT (as they won’t be able to claim your VAT element back from HMRC). Not a problem if you’re supplying to VAT-registered businesses, who simply claim back the VAT that you are charging them. More of a problem if your customers are members of the public or small organisations that are not VAT registered.
• Penalties for late payment
• Some additional book-keeping and reporting requirements – though nothing terrifying if you’re organised, and if you issue small numbers of invoices and have low expenses. The introduction of compulsory MTD software has helped a lot with this.
• VAT returns are due every 3 months using special Making Tax Digital software (see help sheet 4).

VAT registered, and selling overseas?

If you’re VAT registered in the UK you need to be sure whether or not to account for VAT yourself, or whether your overseas client has to account for it.

The rules vary, broadly based on

• whether the client is based within the EU or not
• whether they are VAT registered in their own country or not

This is not the place to go into detail – especially as Brexit has complicated things – but you can find out more on GOV.uk: HMRC – VAT and Supply of Services

You may well need professional advice from an accountant who is used to working with international clients.

A good place to start is on gov.uk:

https://www.gov.uk/guidance/vat-exports-dispatches-and-supplying-goods-abroad >

Find out more:
www.gov.uk/business-tax/vat
www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services
www.gov.uk/vat-registration/purchases-made-before-registration
HMRC National Advice Service: 0300 200 3700
gov.uk – VAT and selling outside the UK
gov.uk – Guide to VAT and digital services in EU
gov.uk – Making Tax Digital for VAT (compulsory software)
Federation of Small Businesses – VAT guide (2024) >