Value Added Tax

Businesses must register for VAT if their taxable turnover exceeds the VAT registration threshold, or if they expect it to exceed the threshold in certain circumstances.

The VAT registration threshold is currently £90,000. The threshold applies to the value of taxable supplies made by a business.

A business must register for VAT if either of the following applies:

1. At the end of any month, the value of taxable supplies made in the past 12 months exceeds £90,000; or
2. At any point, there are reasonable grounds to believe that the value of taxable supplies in the next 30 days will exceed £90,000.

For the first condition, HMRC gives the following example. On 15 July, a business reviews its turnover and finds that taxable supplies made in the previous 12 months total £100,000. This is the first time the business has exceeded the VAT threshold. The business must apply for VAT registration by 30 August, and the effective date of registration will be 1 September.

The second condition can apply where a business knows it will exceed the threshold in the next 30 days. For example, if a business agrees a £100,000 contract on 1 May and payment is due at the end of the month, it must apply for VAT registration by 30 May. The effective date of registration will be 1 May.

The £90,000 threshold also applies to relevant acquisitions of goods from EU Member States into Northern Ireland.

If your business is VAT registered, you can usually reclaim VAT on many of the goods and services you buy for business purposes. However, many businesses fail to claim everything to which they are entitled  and may be able to recover more VAT.

You can normally reclaim VAT on business purchases through your VAT return, provided you hold valid VAT invoices. Where an item is used for both business and personal purposes, only the business proportion of the VAT can be reclaimed. For example, if you work from home or use a mobile phone for both business and personal use, you should calculate and retain evidence of the business element.

You may also be able to reclaim VAT on purchases made before registering for VAT. This generally applies to goods still owned that were purchased within the previous 4 years and services received within the previous 6 months. These purchases must relate to VAT taxable business activities that you supply.

Businesses should also review the special rules that apply to vehicles, fuel and employee travel expenses. While VAT can often be reclaimed on running costs and business travel, restrictions apply to cars used privately, entertainment expenses and items used to make VAT-exempt supplies.

If your business uses the VAT Flat Rate Scheme you cannot usually reclaim VAT on your purchases as this is covered by the scheme. However, VAT can be reclaimed on certain qualifying capital assets costing more than £2,000.

The option to tax is a VAT election that allows businesses to treat supplies of most non-residential land and buildings as taxable rather than VAT exempt. Once an option to tax is made, supplies in relation to that property are generally subject to VAT at the standard rate.

One of the key advantages of opting to tax a property is that it can allow businesses to recover input VAT on related costs, such as the purchase, development and refurbishment of a property, subject to the normal VAT recovery rules.

The decision to opt to tax is normally binding for 20 years and can only be revoked in limited circumstances. It is therefore an important VAT election that should be considered carefully.

HMRC guidance highlights a number of points to consider where changes are made to a property after an option to tax has been exercised:

• Extensions: Where a building that has been opted is later extended, the option to tax will generally apply to the entire extended building.
• Linked buildings: Where two completed buildings are later connected (for example via a covered walkway or internal access), the original option does not automatically extend to the newly linked building if it was previously separate.
• Forming a complex: Where separate units are later combined into a single building or complex, an option to tax made on one part does not automatically apply to the remaining un-opted parts.

The VAT treatment will therefore depend on the physical and legal structure of the property at the time the option is made and any subsequent changes.

Proper advice should always be taken before opting to tax, as it can have long-term VAT implications for both income and capital transactions.

The VAT Cash Accounting Scheme can help businesses improve cash flow by allowing VAT to be accounted for when customers actually pay invoices, rather than when invoices are issued. This can be particularly beneficial for businesses that offer credit terms or experience delays in customer payments.

Under normal VAT accounting rules, VAT is payable to HMRC once an invoice has been raised, even if payment has not yet been received. Using cash accounting helps reduce the risk of businesses funding VAT liabilities from their own resources.

Businesses can normally join the scheme if their estimated VAT taxable turnover is no more than £1.35 million in the next 12 months. Once using the scheme, businesses may continue to do so until turnover exceeds £1.6 million.

However, the scheme is not available in certain situations, including when a business has outstanding VAT returns or payments, has committed a recent VAT offence or is already using the Flat Rate Scheme.

There is no formal approval process required to join. Eligible businesses can start using the scheme from the beginning of a VAT accounting period or from the date of VAT registration if newly registered.

Businesses may also leave the scheme voluntarily at the end of any VAT period and can rejoin later if the eligibility conditions continue to be met.

Businesses that lease cars often assume they can recover all of the VAT charged on car  leasing payments. In practice, the rules are more limited.

Where a business leases a qualifying car, HMRC normally only allows 50% of the VAT on the leasing charges to be reclaimed. The restriction is designed to reflect an element of private use, even where the vehicle is mainly used for business journeys.

The rules are different in certain cases. For example, full VAT recovery is generally available where the vehicle is used as a taxi or for driving instruction, as these are treated as wholly business activities. This would allow qualifying businesses to recover 100% of the VAT charged on the lease.

The 50% restriction can also apply to short-term vehicle hire, including temporary replacement cars. However, where a car is hired for no more than 10 days and is used entirely for business purposes, the VAT block does not usually apply.

These rules can easily be overlooked, particularly where businesses hire vehicles on an ad hoc basis or assume that some business use automatically means full VAT recovery. It is important to ensure that the correct amount of VAT is reclaimed on car leasing costs to avoid issues arising after the fact.

Changes announced in the Autumn Budget have removed the use of a niche VAT scheme known as the Tour Operators Margin Scheme (TOMS) for private hire vehicle operators from January 2026.

TOMS was originally designed for tour operators selling travel packages. However, some large ride-hailing firms had used it to reduce their VAT liability by charging VAT only on their commission, rather than on the full fare. Following ongoing legal uncertainty, the government legislated to exclude taxi and private hire journeys from the scheme.

The change was expected to level the playing field, particularly benefiting black cab drivers in London and smaller taxi firms from outside London where passengers contract directly with the driver.

In practice, the outcome has been more complex. Due to Transport for London licensing rules, most fares in London are now subject to VAT. Outside London, some ride-hailing platforms, including Uber, have restructured arrangements so they act as agents rather than suppliers. This change moves the VAT liability to the drivers. As most drivers earn below the VAT registration threshold of £90,000 this means that on rides outside of London VAT is often still not charged.

For businesses, these changes have important implications when reclaiming VAT. Input VAT can only be reclaimed where it is clearly shown on a valid VAT invoice or receipt. If VAT is not separately identified, no reclaim is permitted, although the expense may still be deductible for Corporation Tax purposes.

The VAT Flat Rate Scheme is designed to simplify the way a business accounts for VAT and, in doing so, reduce the administrative burden associated with VAT compliance. The scheme is available to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000.

The concept of a “limited cost trader” was introduced in April 2017 and can affect the effective VAT payable by businesses using the Flat Rate Scheme. Where a business is classified as a limited cost trader, a fixed rate of 16.5% applies. This is significantly higher than the typical standard flat rate percentages, which can be up to 14.5%.

A limited cost trader is defined as a business whose VAT inclusive expenditure on relevant goods is either:

• less than 2% of VAT inclusive turnover in a prescribed accounting period; or
• more than 2% of VAT inclusive turnover but less than £1,000 per annum (where the prescribed accounting period is one year; if shorter, the threshold is adjusted proportionately).

For some businesses the outcome of the test will be straightforward. Other businesses will need to carry out a simple calculation using existing records to determine whether they meet the limited cost trader definition. Where a business falls within the definition of a limited cost trader, the Flat Rate Scheme is often unlikely to be beneficial. 

It is important to understand both when VAT registration is required and the ongoing obligations that follow. The VAT registration threshold is currently £90,000 of taxable turnover, although businesses below this level can choose to register voluntarily.

Once VAT registered you must ensure you meet your required responsibilities. Businesses must charge VAT on their sales, known as output VAT, while also incurring VAT on most purchases, referred to as input VAT. In practice, VAT-registered businesses act as a collector on behalf of HMRC, charging VAT to customers and paying it over periodically.

The amount payable to HMRC is the difference between output VAT and recoverable input VAT. Where input VAT exceeds output VAT, a refund may be due. However, it is important to note that not all input VAT is recoverable, and care should be taken to ensure claims are valid.

Having a VAT registration also brings with it a number of administrative responsibilities. As a VAT-registered business you must:

• Include VAT in the price of all goods and services at the correct rate.
• Keep records of how much VAT you pay for things you buy for your business.
• Account for VAT on any goods you import into the UK.
• Report the amount of VAT you charged your customers and the amount of VAT you paid to other businesses by sending a VAT return to HMRC. This is usually done every 3 months but there are other options available.
• Pay any VAT you owe to HMRC.

The VAT treatment of car leasing is an important consideration for businesses that incurs VAT on these costs. 

In general, leasing companies are able to recover the VAT incurred on the purchase of cars, provided the vehicles are leased out at a commercial rate. 

For businesses leasing a car, however, the position is more restrictive. Where a business leases a ‘qualifying car’ for business use, only 50% of the VAT on the lease payments is typically recoverable. This restriction reflects an assumed element of private use, even if the car is mainly used for business purposes.

There are some exceptions to this rule. Where a car is used primarily for taxi services (hire with a driver) or for driving instruction, businesses can usually recover 100% of the VAT charged on the lease.

It is also worth noting that the 50% block applies not only to long-term leasing but also to short-term self-drive hire, such as daily rentals used to temporarily replace a company car. The 50% restriction does not apply where a car is hired for a period of no more than 10 days, provided it is used exclusively for business purposes.

Understanding these rules ensures is important to ensure the correct amount of VAT is recovered on car leasing costs. 

Reclaiming VAT on a self-build home project can significantly reduce the overall cost of building or converting your property. The VAT DIY Housebuilders Scheme is a special VAT scheme that allows private individuals to benefit from the same VAT advantages as professional property developers. Under this scheme, the qualifying construction costs of a new home and certain types of conversion work can effectively benefit from VAT zero-rating. This allows qualifying homeowners to reclaim the VAT paid on eligible building materials.

A claim can be made for qualifying building materials on which VAT has been charged. Qualifying materials include most materials incorporated into a new building or conversion which cannot easily be removed. This includes items such as bricks, timber, roofing materials, plumbing, wiring and plaster. Items such as fitted furniture, carpets, curtains, and certain domestic appliances are excluded from the scheme, even if they are installed as part of the build.

In most cases, you must submit a claim within six months of completing the new build or conversion project. Completion is usually evidenced by a completion certificate or similar official documentation.

Claims are normally submitted online. However, if you are unable to use the digital service, you can apply using paper forms. There are two main forms available: VAT 431NB for new build properties, and VAT 431C for qualifying conversions.