How to reduce VAT (legally) and adjust your prices once you're registered

You can’t legally “reduce” the 20% VAT you charge, but you can reduce the amount you actually hand to HMRC and protect your margin: reclaim the VAT on your own costs (input VAT), consider the Flat Rate Scheme if you qualify, and choose whether to pass the 20% on to customers or absorb it. Once you’re VAT registered, the single biggest decision is how you adjust your prices, and that answer depends almost entirely on whether you sell to businesses or to consumers.

There’s no compliant way to make VAT disappear. What you can do is stop paying more than you need to. Three legitimate levers do most of the work:

1. Reclaim your input VAT. Every time you buy goods or services for the business from another VAT-registered supplier, you pay VAT. As a registered business you reclaim that against the VAT you collect, so you only pay HMRC the difference. Keep good records and this alone often changes the maths.
2. Choose the right VAT scheme. The standard scheme, the Flat Rate Scheme and cash accounting all affect what you pay and when. The right one for you depends on your margins, costs and cash flow.
3. Price deliberately. How you set prices after registering decides whether the 20% comes out of your margin or your customer’s pocket.

That last point is where most newly registered businesses get caught out, so let’s work through it.

Once your turnover crosses the VAT registration threshold, currently £90,000 in any rolling 12-month period, you must register and start charging VAT at the standard rate of 20% on most goods and services. Nothing about your costs has changed, but suddenly there’s a 20% layer sitting on top of everything you sell.

That’s why an increase in VAT (or newly becoming liable for it) affects businesses so differently depending on who they sell to. For a business whose customers can reclaim VAT, it’s largely a paperwork change. For one selling to the public, it can feel like an overnight 20% price rise, and that’s a genuine commercial risk to manage.

At this point you have two main choices.

Option 1: Add 20% VAT on top of your prices. You keep your usual net prices and add VAT. If you sold something for £10, the customer now pays £12. To add 20% VAT to a price, multiply by 1.2 (£10 × 1.2 = £12). You still receive your full £10 net per sale, and the customer absorbs the increase.

Option 2: Leave your prices as they are. Your headline price stays at £10, but it’s now VAT-inclusive. That £10 is treated as £8.33 net plus £1.67 VAT (to strip VAT out of a gross price, divide by 1.2: £10 ÷ 1.2 = £8.33). The customer pays the same, but your business absorbs the 20% out of its own margin.

A quick note on displayed prices, because it’s a common question: does RRP include VAT? For UK consumers, yes. Under the Price Marking Order 2004, any price shown to consumers must be the final, VAT-inclusive price, so a recommended retail price aimed at the public already has VAT baked in. B2B price lists, by contrast, are often quoted excluding VAT (labelled “+ VAT”), which is perfectly legal as long as the audience is other businesses.

This is the real decision, and it comes down to whether your customer can reclaim the VAT you charge.

• If you sell mainly to other VAT-registered businesses (B2B): choose Option 1 and add the VAT on top. Your customers reclaim that 20% on their own VAT return, so the increase doesn’t actually cost them anything. You keep your full margin and they’re no worse off. Everybody wins.
• If you sell mainly to individual consumers (B2C): think hard before adding 20%. Consumers aren’t VAT registered and can’t reclaim a penny, so to them Option 1 is simply a 20% price rise with no extra value attached. Here, Option 2, holding your price and absorbing the VAT, often protects sales volume and keeps customers happy, even though it costs you margin.

Many businesses sit somewhere in between and set prices by customer type or product line. There’s no single right answer, only the one that fits your market.

If you absorb VAT, or just want to keep more of your margin, the Flat Rate Scheme is worth a look. If you qualify (broadly, VAT-taxable turnover of £150,000 or less excluding VAT when you join), you pay HMRC a single fixed percentage of your VAT-inclusive turnover instead of accounting for VAT on every sale and purchase.

The flat rate depends on your sector and ranges from 4% to 14.5% (limited-cost businesses pay 16.5%). You also get a 1% discount in your first year of VAT registration. Because the percentage you pay HMRC is usually lower than the 20% you collect, the difference stays in the business as a small surplus, which is exactly how it helps your margin. The trade-off: you generally can’t reclaim input VAT on purchases under the Flat Rate Scheme (with an exception for certain capital assets over £2,000), so it suits low-cost, service-type businesses far more than those with heavy purchasing.

A worked example

Say your sector’s flat rate is around 9%, which drops to 8% in your first year. You make a product with a net price of £10.

• Option 1 (add VAT): the customer pays £12 (£10 + £2 VAT). Under the Flat Rate Scheme you pay HMRC 8% of the VAT-inclusive £12 = £0.96. You collected £2 but only hand over £0.96, keeping the £1.04 difference on top of your £10.
• Option 2 (absorb): the customer still pays £10 (£8.33 net + £1.67 VAT). You pay HMRC 8% of £10 = £0.80. There’s no extra £2 from the customer, so you keep £9.20 of your original £10.

Same product, very different outcomes, which is why the pricing decision and the scheme choice go hand in hand.

Getting VAT registration and pricing right is exactly the kind of margin decision our team helps scaling businesses navigate every day. If you’d like to talk it through, explore our outsourced finance and advisory services, call us on 01454 300 999, or email [email protected].