The year 2025 marks yet another chapter in the long and complicated story of Value Added Tax (VAT) in the United Kingdom — a tax that, despite initial promises of simplicity, remains a real challenge for entrepreneurs.
When VAT was first introduced in the UK in 1973, it was intended to be a “simple tax.” That’s how then-Chancellor of the Exchequer Anthony Barber described it. But fifty years on, the reality is far from that early vision.
VAT in the UK: Rates and Thresholds
Today, there are three VAT rates in operation:
- Standard rate — 20% (e.g., chocolate);
- Reduced rate — 5% (e.g., child car seats);
- Zero rate — 0% (e.g., bicycle helmets and other select goods).
However, not every business is required to register for VAT. The threshold for mandatory registration is an annual turnover of £85,000. Small businesses earning up to £150,000 annually can opt into the simplified VAT Flat Rate Scheme, while those exceeding that limit must use the standard accounting scheme.
Despite its structured appearance, the system often feels more chaotic than orderly to those who deal with it daily.
Survey: 71% of UK Businesses Find VAT Too Complicated
In March 2024, Avalara, in collaboration with research firm Censuswide, surveyed over 1,000 representatives of UK businesses to assess how complex the current VAT system really is.
The findings were telling:
- 71% of respondents said the tax system is overly complicated;
- Only 51% said they understand their VAT obligations clearly;
- Nearly half of the businesses reported spending 10 to 40 hours per month managing VAT-related tasks;
- The highest time burden was reported among medium-sized businesses and professionals in finance, IT, and HR.
Challenges and Consequences: From Audits to Overpayments
VAT has become a headache for many businesses primarily because of the need to calculate taxes independently, keep meticulous records, and submit detailed declarations. With tax regulations constantly evolving, doing this without a qualified accountant is often unrealistic.
The result? Mistakes.
One in four companies (24%) has undergone a tax audit, and in sectors like marketing and media, the audit rate jumps to 35%.
Additionally, 20% of businesses admitted to overpaying VAT due to calculation errors. That’s money which could have been reinvested into the business — instead, it ends up stuck in the tax system.
Digital Tools to the Rescue: From MTD to In-House Solutions
To save time and reduce risk, many companies are embracing digital solutions. According to the survey:
- 71% of entrepreneurs are investing in digital tools to streamline VAT processes;
- 46% are using technology to file VAT returns;
- 43% rely on digital tools for preparing documentation;
- 22% use systems for automated VAT calculations.
Since November 2024, the UK’s Making Tax Digital (MTD) initiative has been in effect — a government-led move to digitise tax reporting. Thanks to MTD, companies can now submit returns directly via HMRC’s API system. While the digital shift has brought improvements, it hasn’t solved all the challenges.
What Businesses Need to Know When Entering the UK Market
For anyone launching a company in the UK, it’s essential to prepare for the bureaucratic weight of VAT compliance:
- Preparing and filing VAT returns can consume dozens of hours each month;
- Mistakes can trigger audits or lead to overpayments;
- The solution lies in technology investments — automation, data validation, and real-time reporting tools.
What’s Next: Digital Transformation or New Layers of Complexity?
Despite HMRC’s ongoing efforts to simplify the system, VAT still feels less like a tax and more like a full-time occupation. To survive, businesses must either master the system themselves or invest in professional support and technology.
One thing is clear: the tax that was meant to be simple has become a symbol of the UK’s fiscal complexity.