The VAT landscape in the UK has undergone significant changes in 2025, impacting businesses of all sizes. Whether you’re a small enterprise or a large corporation, staying informed about these updates is crucial for compliance and financial planning.

Here’s a breakdown of the key VAT changes you need to know:

1. Increased Late Payment Interest Rates

Starting from 6 April 2025, HMRC has increased the rate of late payment interest from 2.5% above the Bank of England base rate to 4% above base rate. This change aims to encourage timely tax payments and may result in higher costs for businesses that delay payments.

2. Simplified VAT Scheme for SMEs

On 1 January 2025, the EU introduced a new VAT scheme designed to simplify compliance and reduce administrative burdens for small and medium-sized enterprises (SMEs). This scheme includes measures such as:

  • Standardised VAT rates across member states.

  • Simplified invoicing requirements for cross-border transactions.

  • Unified VAT registration procedures within the EU.

These changes aim to make VAT compliance more straightforward for SMEs operating across EU borders.

3. Changes to VAT Deduction Rules for Pension Funds

As of 18 June 2025, employers can now claim back all VAT on investment costs linked to pension funds. Previously, businesses were required to split the costs with pension trustees. This policy shift is expected to reduce the VAT burden on businesses and simplify VAT deductions related to pension schemes.

4. VAT Deduction Time Limit Reduced

A significant change in 2025 is the reduction of the time limit for claiming VAT deductions from three years to two years. Businesses can now only claim deductions up to the end of the second year following the calendar year in which the deduction arises. This change applies to documents with taxable supplies from 1 January 2025 onwards and does not apply to reverse charge supplies.

5. Final VAT Return Submission Deadline Extended

For businesses de-registering from VAT, the deadline for submitting the final VAT return has been extended. HMRC now has the authority to grant additional time for businesses to submit their final return, ensuring fairness and equity in the VAT de-registration process. This change provides businesses with more flexibility during the transition period.

6. VAT on Imported Goods Simplified

The EU has introduced new rules to simplify VAT collection on imported goods. Under the new directive, suppliers are now liable for VAT paid on imports, rather than the EU consumer. This change encourages suppliers outside the EU to use the VAT Import One-Stop-Shop (IOSS) for VAT reporting and collection, streamlining the process for cross-border transactions.

Stay Compliant with the New VAT Rules

Navigating these VAT changes can be complex, but staying informed and proactive is key to ensuring compliance and optimising your business’s financial operations.

If you have any questions or need assistance with VAT planning and compliance, feel free to contact us at Amica Accounting. We’re here to help you understand and adapt to these new rules.