21st January 2026

VAT Accounting for Small Businesses

VAT accounting is one of the most significant, and often one of the most confusing tasks small businesses face in the UK. If you’re preparing to register for VAT for the first time or you’re closing in on the VAT threshold, it pays to understand how VAT works, how to account for it properly and what schemes are available to you.

In this guide, we cover everything you need to know about VAT accounting for small businesses, including VAT thresholds, how VAT returns work, and how the different VAT schemes work.

What Is VAT Accounting?

VAT accounting is the process of recording, reporting and paying VAT to HMRC. Essentially, VAT registered businesses:

Charge VAT on sales (output VAT)
Claim back VAT on eligible purchases (input VAT)
Pay the difference to HMRC via a VAT return

If you’ve charged more VAT than you’ve paid, you’ll owe money to HMRC. If you’ve paid more VAT than you’ve charged, you may be entitled to a refund.

When Does a Small Business Need to Register for VAT?

You’re required to register for VAT if your business is generating a taxable turnover of more than £90,000 over any rolling 12-month period. Businesses with a turnover under this threshold can also voluntarily register for VAT. There are benefits to doing this, which we’ll explore later in this guide.

You need to register for VAT when:

Your taxable turnover is greater than £90,000
You anticipate your turnover to exceed £90,000 within the next 30 days

Once registered, you’re required to charge VAT on all eligible goods and services sold from your effective registration date.

How VAT Returns Work

VAT returns are made quarterly (every three months) and must be submitted through digital software that’s compliant with Making Tax Digital (MTD).

Your VAT return will detail:

Total sales made and output VAT charged to customers
Total purchases and reclaimable input VAT paid
Net VAT to pay to (or reclaim from) HMRC

It’s important to note that VAT returns are still due on time even if your business owes no VAT. Returns are typically due one month and seven days after the end of your VAT period.

VAT Accounting Schemes for Small Businesses

HMRC provides a number of VAT accounting schemes to make reporting easier for businesses. Tax schemes can improve cashflow and make VAT admin simpler, so it’s important you pick the right one for your business.

1. Standard VAT Accounting

If you do not join a VAT scheme, you will use standard VAT accounting. With standard VAT accounting you:

Account for VAT on due date of invoices
Pay VAT on invoices raised to suppliers, even if you haven’t been paid

Standard VAT is best suited to businesses with stable cash flow.

2. Cash Accounting Scheme

With the Cash Accounting Scheme:

You pay VAT when you receive payment from your customer
You reclaim VAT when you pay your supplier

The scheme can help businesses with cash flow and is available if your VAT taxable turnover is £1.35 million or less.

3. Flat Rate Scheme

The Flat Rate Scheme allows businesses to:

Charge customers VAT at the standard rate
Pay HMRC a fixed percentage of your gross turnover

As a rule, you can’t reclaim any VAT on purchases. There are exceptions for capital assets. This scheme reduces your admin duties and is available if your business has a turnover of under £150,000 (excluding VAT).

4. Annual Accounting Scheme

Instead of quarterly VAT returns, you’ll:

Submit one annual VAT return
Make payments to HMRC throughout the year

The admin burden is less than with regular quarterly returns. The annual accounting scheme is available if your turnover is £1.35 million or less.

Common VAT Accounting Mistakes to Avoid

Some of the most common VAT-related headaches affect businesses who:

Miss the VAT registration threshold
Attempt to reclaim VAT on non-allowable purchases
Submit late or incorrect VAT returns
Use the wrong VAT scheme for their business

Running into problems with VAT can cause issues with cash flow and you may be faced with penalties from HMRC. In extreme cases, your business may be investigated.

How a Professional Accountant Can Help with VAT

VAT rules are frequently updated by HMRC and a scheme which works for one business may not suit another. A professional accountant can help you:

Choose whether or not to register for VAT
Select the most suitable VAT scheme
Help with Making Tax Digital compliance
Prepare and submit accurate VAT returns
Maximise your cashflow
Avoid unnecessary penalties from HMRC

Making VAT Accounting Easy

Keeping on top of your VAT accounting doesn’t have to be a chore. Use technology to automate where you can and work with a professional accountant to keep things simple.

At Phinch, we provide high-quality accounting services tailored to small businesses. If you’d like expert assistance with VAT accounting or advice on VAT schemes, get in touch today.