If you run a business in the UK, you’ve probably had a run-in with VAT. At 20%, it’s a hefty chunk – but not every business has to pay or charge VAT. Some businesses are completely exempt, while others can use simplified schemes like the Flat Rate VAT Scheme to keep things easier.
Understanding VAT rules isn’t just about staying compliant – it’s about saving money and reducing hassle.
In this article, we’ll cover:
- Who is exempt from VAT
- The difference between VAT-exempt and zero-rated businesses
- How the Flat Rate VAT Scheme works (and if it’s worth it for you)
You can also consult our guide on registering for VAT if you are unsure about the process.
Which businesses are exempt from VAT?
Not every business has to deal with VAT. Some don’t charge it, some don’t pay it, and some don’t even have to register.
Here’s how it breaks down:
1. VAT-exempt goods & services
Some businesses don’t charge VAT at all. If your entire business deals with VAT-exempt goods or services, you don’t need to register for VAT and you can’t reclaim VAT on business expenses either.
Common VAT-exempt services include:
- Financial services (e.g. insurance, credit, and loans)
- Medical services (e.g. doctors, dentists, opticians)
- Education and training (if provided by approved institutions)
- Charity fundraising events
- Memberships for certain organisations (similar to the rules on Education and Training)
If this sounds like your business, the good news is less paperwork, however, you won’t be able to reclaim VAT on things like office supplies, rent, or advertising costs.
2. Zero-rated businesses
Zero-rated businesses must register for VAT but they don’t charge it on their sales. The upside is that they can reclaim VAT on their business expenses.
Common zero-rated items include:
- Most food and drinks (but not alcohol, confectionery, or luxury items)
- Printed books, newspapers, and magazines
- Children’s clothing and footwear
- Public transport fares
While you won’t charge VAT, you’ll still need to keep records and submit VAT returns. It’s extra admin, but worth it if you want to claim back VAT on purchases.
3. Businesses below the VAT threshold
If your business turnover is under £85,000 (the 2024/25 VAT threshold), you don’t have to register for VAT. This can be a big advantage, as it means less paperwork which means fewer hours stressing about your business, no VAT to charge, and more flexibility.
That said, some small businesses choose to register voluntarily, as if they buy VAT-eligible goods and services, they can reclaim VAT and cut their costs.
If you are unsure of whether it might be worth it, then it is always recommended to get advice from an expert.
What is the Flat Rate VAT Scheme?
The Flat Rate VAT Scheme is like VAT for busy people. Instead of tracking VAT on every single sale and expense, you just pay a fixed percentage of your total turnover to HMRC.
How does the Flat Rate VAT Scheme work?
- You charge customers the usual VAT rate (20%).
- Instead of calculating VAT on every transaction, you pay a fixed percentage of your total turnover.
- You can’t reclaim VAT on most purchases (except for capital assets over £2,000).
This scheme is best for businesses with low expenses, such as freelancers, consultants, and small service-based companies.
Who can join the Flat Rate VAT scheme?
To qualify, you must:
- Be VAT-registered
- Have an annual turnover of £150,000 or less (excluding VAT)
- Not have used the scheme in the past 12 months
If your total income exceeds £230,000 (including VAT), you’ll have to leave the scheme.
Flat rate percentages by industry
Each industry has a different flat rate percentage.
Here are some examples:
- IT consultants – 14.5%
- Management consultants – 14%
- Advertising businesses – 11%
- Retailers (non-food) – 7.5%
- Catering services – 12.5%
You can find the full list of rates on the HMRC website.
Example: how the Flat Rate VAT Scheme works
Let’s say you’re a freelance designer earning £50,000 per year (excluding VAT).
- You charge clients VAT (20%), bringing your total to £60,000.
- Instead of paying the full £10,000 VAT to HMRC, you pay 14.5% of £60,000 = £8,700.
- You keep the extra £1,300 as additional profit.
For businesses with low VAT expenses, this can be a profitable and hassle-free way to handle VAT.
Should you use the Flat Rate VAT Scheme?
The Flat Rate VAT scheme can be a good fit if:
- You don’t have many VAT-eligible expenses.
- You want to simplify VAT accounting and reduce paperwork.
- Your industry has a low flat rate, meaning you keep more VAT.
It’s not ideal if:
- You have high VAT costs, like frequent equipment purchases.
- You want to reclaim VAT on expensive business investments.
Managing VAT payments
Even with exemptions and simplified schemes, VAT can strain your cash flow, especially if you’re hit with a large bill.
This is because when a business is struggling for air, they will inevitably delay making VAT payments, to try to keep trading for as long as possible to try to get out of the hole they have found themselves in.
A VAT loan can help cover VAT payments and prevent:
- Late payment penalties
- Cash flow issues
- Lump-sum VAT payments eating into your budget
If VAT payments are stretching your finances, a VAT loan could be worth considering.
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.
If you are looking for a loan, but aren’t sure what to go for, then Rise Funding you can get an instant business quote in seconds.
You can also use the form below to find the business funding that you need. We also offer VAT loans to help you with your VAT bill and reduce the impact of late payment fines.
