VAT for the Self-Employed

VAT registration is mandatory once you hit the threshold. Here is when that happens, what it means in practice, and which scheme to use.

Check GOV.UK

VAT registration threshold

The threshold was £90,000 for 2024/25. Verify the current figure at GOV.UK — it changes: gov.uk/vat-registration/when-to-register

Rolling 12 months

How the threshold is measured

Not April to April. Any rolling 12-month period. Many people miss this distinction.

20%

Standard VAT rate

Most goods and services. Reduced rate (5%) and zero rate also apply to specific categories.

MTD

Making Tax Digital required

All VAT returns must be submitted via MTD-compatible software. No manual submissions.

Rolling 12 months — not the tax year

You must register for VAT if your taxable turnover exceeds the current registration threshold in any rolling 12-month period. This is not April to April. It is not calendar year. It is any 12-month window.

That means if you have a strong July to June, you may cross the threshold before the April tax year ends. Check your rolling total each month if you are approaching the threshold. Failing to register in time carries penalties.

Verify the current registration threshold at GOV.UK: https://www.gov.uk/vat-registration/when-to-register

What VAT registration means in practice

Once you are VAT registered, you charge VAT on top of your prices for most goods and services. The standard rate is 20%. You collect this from your customers and hold it for HMRC. You submit a VAT return (usually quarterly) and pay over whatever you have collected, minus any VAT you have paid on your own business purchases.

The trade-off: more admin, but you get to reclaim VAT on your costs. If you buy significant business equipment or supplies, this can be a real cash benefit.

VAT registration can also make you look more established in the eyes of other businesses — a VAT number on an invoice signals a turnover above the threshold. For some clients, this matters.

One thing to be clear about: if your customers are private individuals (not businesses), they cannot reclaim the VAT you charge. For them, your prices go up by 20%. If you are close to the threshold and your customers are mostly consumers, think carefully about timing and pricing before the registration kicks in.

Voluntary registration — when it makes sense

You can register for VAT voluntarily before you hit the threshold. There are genuine reasons to do this.

When voluntary registration makes sense: most of your customers are VAT-registered businesses. They can reclaim the VAT you charge them, so the 20% does not hurt them commercially. You also get to reclaim VAT on all your own business costs immediately.

When it does not make sense: most of your customers are private individuals. They cannot reclaim VAT, and adding 20% to your prices makes you less competitive. If your business costs are low and you have little VAT to reclaim, the extra admin may not be worth it until you are genuinely close to the threshold.

The main VAT schemes

Once registered, you choose a VAT scheme. The standard quarterly scheme is the most common, but others may suit your business better.

Standard quarterly accounting: file a VAT return every 3 months. Pay or receive the difference between VAT collected on sales and VAT paid on purchases. Most straightforward for businesses with regular, predictable sales.

Flat Rate Scheme: instead of tracking every VAT transaction, you pay a fixed percentage of your gross VAT-inclusive turnover to HMRC. The percentage varies by industry sector and is lower than 20% because it accounts for the fact that you cannot reclaim VAT on purchases under this scheme. Simpler admin, but whether it saves money depends entirely on your cost base. Check the current sector rates at GOV.UK: https://www.gov.uk/vat-flat-rate-scheme/eligibility. Compare carefully with an accountant before choosing.

Cash Accounting Scheme: you only account for VAT when you are actually paid, rather than when you raise the invoice. Useful if your clients pay slowly — you do not have to pay HMRC VAT on an invoice that has not yet been settled. The mirror applies on the purchase side: you can only reclaim VAT when you pay your own supplier, not when they invoice you.

Annual Accounting Scheme: submit one VAT return per year instead of four, with interim payments throughout the year based on an estimate. Simpler admin, less visibility on your cash position. Suits businesses with stable, predictable turnover.

Talk to an accountant before choosing a scheme if you are unsure. Switching schemes later is possible but involves some administrative steps.

Making Tax Digital — what it means for VAT

All VAT-registered businesses must submit returns using MTD-compatible software. You cannot submit a VAT return via a manual spreadsheet or by typing figures into HMRC's portal. The software must maintain digital records and submit directly to HMRC.

HMRC publishes a list of approved MTD-compatible software at GOV.UK: https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat

Many options are available at low or no cost for sole traders. This is a compliance requirement, not an optional extra. New VAT registrants should set up MTD-compatible software before they need to file their first return.

Deregistering from VAT

If your taxable turnover drops below the deregistration threshold (which is slightly lower than the registration threshold — verify the current figure at GOV.UK), you can apply to deregister voluntarily. If you close your business, you must deregister.

Deregistration has implications: you stop charging VAT to customers, but you must also repay any VAT you have reclaimed on assets you still hold, in certain circumstances. GOV.UK explains the rules: https://www.gov.uk/vat-registration-thresholds

Practical guides for the self-employed — tax, VAT, and what HMRC does not make obvious.

Common questions about VAT for the self-employed

Do I have to register for VAT if I am under the threshold?▾

No — registration below the threshold is voluntary. You only must register when your taxable turnover in any rolling 12-month period exceeds the current registration threshold. Verify the current figure at GOV.UK: gov.uk/vat-registration/when-to-register

What happens if I go over the threshold and do not register?▾

HMRC can assess you for the VAT you should have charged and collected, going back to when you should have registered. You are liable for that VAT even if you never collected it from customers. Penalties apply for late registration. If you think you are approaching the threshold, check your rolling 12-month turnover regularly.

Can I reclaim VAT on purchases made before I registered?▾

Yes, in some cases. You can reclaim VAT on goods bought up to 4 years before registration (if you still hold them) and on services received up to 6 months before registration, provided they relate to your taxable business activities. Keep records and invoices. The full rules are at GOV.UK.

What is the Flat Rate Scheme and is it worth it?▾

The Flat Rate Scheme lets you pay a fixed percentage of your gross VAT-inclusive turnover to HMRC rather than tracking every VAT transaction individually. It simplifies admin but you cannot reclaim VAT on purchases. Whether it saves money depends on your sector rate and your cost base. For businesses with low costs and a low sector rate, it can be financially beneficial. For businesses with high costs and lots of VAT to reclaim, it usually is not. Compare both options with an accountant.

Is there a penalty for late VAT registration?▾

Yes. HMRC charges a percentage of the net VAT due between when you should have registered and when you actually did. The rate depends on how late you were. There is no minimum penalty for genuine first-time mistakes, but the longer you leave it the more it costs. Register as soon as you realise you have crossed the threshold.

What software do I need for Making Tax Digital?▾

HMRC maintains a list of MTD-compatible software at GOV.UK. Many widely-used bookkeeping tools are on the list, including options with free tiers. You cannot submit VAT returns manually via the HMRC portal — the software must connect directly to HMRC systems. Check the current approved list at: gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat

Can I stay on the Flat Rate Scheme indefinitely?▾

There is a threshold for the Flat Rate Scheme — verify the current eligibility limits at GOV.UK. If your total VAT-inclusive turnover exceeds the ceiling, you must leave. You can also leave voluntarily at any time. You are automatically excluded if HMRC deems you a limited cost trader (a specific category under FRS rules — verify at GOV.UK, as the limited cost trader designation affects the rate you pay).

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Something out of date?

VAT thresholds and scheme rules change. If anything looks wrong, let us know.

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