VAT is a type of tax in the UK that is necessary for all businesses that reach a certain level of annual turnover.
According to the ONS, the number of businesses in the UK that pay VAT is 2.725 million – which was a small decrease of 0.1% from March 2023.
If you’re looking to register for VAT or find out whether you need to register for VAT, then this article has everything you need, as well as debunking some common misconceptions about VAT.
What is VAT?
VAT stands for ‘Value Added Tax’ and is a tax added to products and services. In 2024, the VAT threshold was £85,000, but as of April 1st 2024, the threshold was increased.
As of 2025, the current VAT threshold is £90,000. This means that all businesses that have a turnover of over £90,000 must become VAT-registered businesses.
The law states that you must register for VAT when you realise your turnover will exceed the threshold, not once it goes over. This rule has been created so that businesses are paying their VAT from the moment they are over the threshold.
VAT in the UK is currently 20%. This means all businesses that are VAT-registered must include VAT in the price of all goods and services at the rate of 20%.
You can find out more about how VAT works in the UK on Gov.uk.
Flat rate & zero-rated
Certain businesses that go over the £90,000 threshold are exempt from VAT.
These businesses can include businesses involved with charity, public transport, books and publications and other essential goods. These businesses are referred to as ‘zero-rated’.
There is also an additional rule for some small traders with supplies worth less than £150,000 (per annum) with a limited range of expenses, known as the VAT Flat Rate Scheme, which allows businesses to pay their VAT based on a flat rate calculation, rather than your total turnover.
How to register for VAT
Registering for VAT can be done online or via post, but generally, most applications are done online as they are faster and more efficient.
You can register online at Gov.uk. Once your business has passed the VAT threshold, you must register for VAT within 30 days.
How long does VAT registration take?
VAT registration can take up to 30 days upon registration. However, the entire process might take longer depending on the complexity of your business.
You will receive your VAT certificate within 30 working days after completing the application.
However, you need to make sure that you have everything in place before starting your application.
You will need:
- Your Company Registration Number (CRN)
- Your business bank account details (to verify your earnings)
- Your Unique Taxpayer Reference (UTR)
- Details of your annual turnover (e.g., sector, type of business)
Gathering this information can take time, so make sure that you have all your details to hand before you begin an application. Otherwise, you might end up delaying the process if you enter the wrong details.
Can I have two businesses to avoid VAT?
Having two businesses to avoid VAT can seem like a good strategy on the surface, but it is considered tax avoidance. HMRC defines this practice as ‘VAT disaggregation’ and could subject you to a tax investigation.
There are many legitimate reasons for having two businesses, and even splitting a business into two different revenue streams. However, to split a business purely to avoid VAT is illegal and if you do so, you will be asked to combine the two businesses and pay the owed VAT. You could also be subject to penalties.
Make sure that if you have two businesses, or are splitting a business, you can satisfy HMRC that they are two genuinely separate entities, otherwise you might be investigated.
VAT disaggregation metrics
HMRC will look at various parts of your businesses to ensure they are separate.
HMRC will be looking for indicators that your businesses are actually the same, such as:
- Shared bank accounts
- Same offices, equipment and staff
- Shared marketing and advertising
It will also take into account the financial interest of the businesses, and whether one can be sustained without the other.
They may require evidence that your two businesses are not sharing capital or are financially dependent on one another.
While the distinction between businesses can be subjective, HMRC will assess you based all of the above and make a final decision.
What is the difference between sales tax and VAT?
In the UK, there is no sales tax, only VAT.
Sales tax is an umbrella term for many types of tax taken at sale, which means that VAT can be considered a form of sales tax.
There is often confusion between sales tax and VAT due to the fact they are so similar, and are both consumption taxes put on goods and services, however, they are separate tax systems.
Another reason for the confusion is that the UK imposes VAT, whereas the US does not, but instead has sales tax in certain states, which often serves a similar purpose. In the US, there is no federal sales tax.
Therefore, US bodies often refer to VAT as the UK’s sales tax, even though VAT refers to a different system.
Differences in collection
A subtle but significant difference between sales tax and VAT means that the amount of tax collected can differ.
VAT is collected from overall annual earnings, regardless of how many transactions were made. However, sales tax is often collected per transaction, which can actually add up to a much greater tax bill if there is a high volume of transactions. Having said this, sales tax is generally lower than VAT (which is currently 20%).
Sales tax is also often taken at a local level, such as in the US and India, as opposed to a national level.
You can use this sales tax calculator to see all the different sales tax rates in different US states. The amount of tax will vary depending on the product, for example, some prescriptions and foods have no tax, but then products such as alcohol will be heavily taxed.
Conclusion
VAT is a legal requirement in the UK for all businesses that surpass a certain threshold of earnings.
Late payment on VAT can be expensive, so make sure that you know all the requirements and have registered in sufficient time.
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