If you’re running a small business, VAT is likely a regular part of your operations – and often, a source of confusion. With several changes to VAT rules on the horizon, including updates to Making Tax Digital (MTD) and thresholds, it’s a good idea to get ahead and understand what’s changing, how it might affect your business, and what steps you can take to stay on top of things.

Let’s break it down into clear, manageable sections so you can focus on what matters most – running your business.

What’s changing in 2025?

The upcoming VAT changes include updates to registration thresholds, the VAT penalties regime, and digital filing requirements. Here’s a quick summary:

1. VAT registration threshold
   From 1 April 2024, the VAT registration threshold increased from £85,000 to £90,000, and it will remain frozen until at least March 2026. This means if your taxable turnover reaches or exceeds £90,000 in any 12-month rolling period, you must register for VAT. Monitoring turnover regularly is essential for smaller businesses hovering near this figure to avoid missing deadlines.
2. Changes to VAT penalties
   A new points-based penalty system for late VAT submissions and payments was introduced for accounting periods starting on or after 1 January 2023. The system emphasises maintaining accurate records and submitting returns on time. Under this regime, penalty points accumulate for each missed deadline. When a certain threshold is reached – based on your accounting period – a fixed penalty of £200 is applied, with additional £200 penalties for subsequent late submissions while at the threshold. Businesses can reset their points through consistent compliance, encouraging prompt rectification of errors and timely submissions.
3. MTD compliance
   If you’re VAT-registered, you’ll already know about MTD requirements. Since April 2022, all VAT-registered businesses must comply with MTD, including those below the £90,000 threshold that voluntarily register for VAT. This means using compatible software for record-keeping and filing returns.

Why does this matter?

For small businesses, VAT can seem like another layer of admin, but these changes aim to streamline processes and encourage compliance. While that sounds good on paper, the reality is that staying compliant often means adapting how you work.

For instance:

• Monitoring your turnover monthly, not annually, to ensure timely VAT registration.
• Keeping better digital records to avoid penalties.
• Upgrading accounting software to meet MTD requirements.

Being proactive about these changes will save you time, money, and stress in the long run.

How can you prepare?

We recommend focusing on three key areas: reviewing your turnover, upgrading your systems, and understanding your responsibilities.

1. Review your turnover regularly
   Don’t rely on old spreadsheets or rough calculations to track turnover. Use up-to-date software to generate real time reports and flag when approaching the VAT threshold. This will help you register for VAT on time and avoid penalties.
2. Upgrade to MTD-compliant software
   Many affordable options exist, from basic software for sole traders to more comprehensive tools for growing businesses. Check with your accountant to ensure your chosen system ticks all the boxes for MTD compliance.
3. Understand the penalty points system
   If you’re occasionally late with VAT submissions, the new system won’t punish you straight away. However, repeated delays will result in penalties. Familiarise yourself with the deadlines for submissions and payments, and consider automating reminders or delegating these tasks to a professional.

Common questions about the 2025 VAT changes

Do I need to register for VAT if I make less than £90,000 annually?
No, unless you choose to register voluntarily. However, voluntary registration can make sense for businesses with high input VAT or those looking to appear more established to clients.

What’s the penalty for missing a VAT deadline?
The new points-based system assigns one penalty point for each missed VAT return deadline. If you reach the penalty threshold, you’ll receive a £200 fine. The threshold depends on your VAT submission frequency: two points for annual returns, four points for quarterly returns, and five points for monthly returns. For example, if you submit quarterly and miss four deadlines within a 24-month period, you’ll incur a £200 fine. Each subsequent late submission while at the threshold results in an additional £200 penalty.

Can I still use spreadsheets for VAT returns under MTD?
Yes, but they must be linked to MTD-compatible software for digital submission. Speak to your accountant about the best way to integrate spreadsheets with software.

Let us help you get ready

If you’re unsure where to start, we’re here to help. Whether you need help choosing the right software, understanding your VAT obligations, or filing your returns accurately, we can support you every step of the way.

VAT doesn’t have to be a hassle – with the right approach, you can stay compliant, save time, and focus on what matters: growing your business.

Need help with the latest VAT changes? We’re here. Get in contact with us today.