VAT & Pricing: What Every Business Owner Should Know

Navigating VAT as a business owner can be tricky, even if you've dealt with it before. If you're approaching the VAT registration threshold, it's a good time to consider how this change might impact your pricing strategy and your bottom line.

In this guide, we’ll break down how VAT registration can affect your fees, margins, and pricing decisions, plus the key things to think about before making the move.

VAT & Pricing: Why It Matters

Once your taxable turnover reaches the VAT registration threshold (currently £90,000 in any 12-month period), you must register for VAT.

After registration, you’re required to charge VAT on taxable sales, and

report and pay VAT collected to HMRC.

Effectively, you become a collector for HMRC, so it’s important to plan how this new responsibility fits into your pricing.

Your Options: Adjusting Prices for VAT

VAT impacts your pricing in one of three main ways:

1. Keep prices the same (VAT-inclusive)

• You’ll absorb the VAT cost

• Customer prices stay unchanged

• Your profit margin shrinks

2. Add VAT to current prices

• Prices rise by 20% (standard rate)

• Business customers may reclaim VAT, but individual consumers cannot

• Risk of deterring price-sensitive customers

3. Compromise with a partial increase

• Raise prices slightly (e.g., by 10%) and absorb the rest

• You and your customer share the VAT burden

Each route has pros and cons, and the right choice depends on your business model and customer base.

UK VAT Rates Explained

The amount of VAT you must charge depends on what you're selling:

VAT Rate	Rate	Examples
Standard	20%	Most goods and services
Reduced	5%	Children's car seats, domestic energy, mobility aids (60+)
Zero-rated	0%	Books, newspapers, children’s clothes, motorcycle helmets

💡 Even zero-rated goods must be reported on your VAT return!

Who Are Your Customers?

Your target audience plays a big role in shaping your VAT strategy. If most of your customers are VAT-registered businesses, adding VAT to your prices might not be a big issue, as they can usually reclaim it on their own returns. However, they might still be conscious of cash flow implications.

On the other hand, if you’re selling directly to consumers, the situation is different. End customers can’t reclaim VAT, so a noticeable price increase could affect demand. In this case, you might consider sharing the VAT cost with your customers or communicating clearly about the change to help them understand what’s happening and why.

Should You Register Voluntarily?

Even if you're below the threshold, voluntary VAT registration might work in your favour.

Benefits of voluntary VAT registration:

• Claim VAT refunds on business expenses- could lead to regular refunds if your expenses are high

• Boost credibility with clients by appearing more established

• Make business transactions smoother

• Avoid penalties for accidentally exceeding the threshold in the future

• Reclaim past VAT on eligible purchases made before registration

Talk to your accountant to weigh the pros and cons for your business.

How to Register for VAT

You can register online through HMRC’s website, which is the quickest and most common method. Alternatively, you can register by post in certain cases, such as when applying for an exemption or registering separate divisions of a business.

If you prefer not to handle it yourself, you can appoint an accountant or agent to register and manage VAT on your behalf. This can save time and reduce the risk of errors.

During registration, you’ll also choose which VAT scheme you want to use. Different schemes are available depending on your business size and structure, and the right one can help simplify your VAT reporting.

Responsibilities After Registration

As a VAT-registered business, you must:

• Charge the correct rate of VAT on sales

• Show VAT on invoices and include your VAT number

• File VAT returns (typically quarterly)

• Keep proper VAT records

For more on this, check out our guide on Making Tax Digital requirements.

Final Thoughts

VAT registration is a significant milestone for any business, and it comes with a mix of new responsibilities and potential benefits. How you approach pricing, how you communicate with customers, and whether you choose to register voluntarily should all be guided by your business goals and customer base.

Need help with VAT?

If you’re unsure whether VAT registration is right for you or how to adjust your pricing, speak to an accountant. And if you’re ready to register, our team can help simplify the process!

For more info on VAT, check out our YouTube video!