VAT is one of those topics many small business owners leave until a customer asks for their VAT number or their accountant raises it at year end. Getting the timing wrong can be expensive, because if you register late you may have to pay VAT on sales you have already made. This guide explains when you must register, how taxable turnover is worked out, what changes once you are registered and the schemes that may simplify things. It is general information, not personal advice, so check HMRC's guidance or speak to an accountant about your own circumstances.

What VAT is, in one paragraph

Value Added Tax is a tax charged on most goods and services sold by VAT-registered businesses in the UK. Once registered, you add VAT to your prices where it applies, pay it over to HMRC, and can usually reclaim the VAT you pay on business purchases. The difference between the two is what you pay or get back each period.

When you must register

According to HMRC, you must register for VAT if either:

  • your total taxable turnover for the last 12 months goes over 90,000, pounds or
  • you expect your taxable turnover to go over 90,000 pounds in the next 30 days.

The 90,000 pounds figure is the current VAT registration threshold. Thresholds can change, so always check the latest figure on GOV.UK.

The "last 12 months" test

This is a rolling test, not a tax year or calendar year test. You need to check your turnover over the previous 12 months at the end of every month.

HMRC says you must register within 30 days of the end of the month in which you went over the threshold, and your effective date of registration is the first day of the second month after you go over. HMRC's own example: if on 15 July your rolling 12-month turnover reaches 100,000 pounds for the first time, you must register by 30 August and your effective date of registration is 1 September.

The "next 30 days" test

If you realise your taxable turnover will go over 90,000 pounds in the next 30 days alone, for example because you have just won a large contract, you must register by the end of that 30-day period. Your effective date of registration is the date you realised, not the date the turnover arrives. HMRC's example is a 100,000 pounds contract arranged on 1 May: you must apply by 30 May, and you are registered from 1 May.

What counts as taxable turnover

HMRC defines taxable turnover as the total value of everything you sell that is not VAT exempt or outside the scope of VAT. It includes:

  • standard-rated, reduced-rated and zero-rated goods and services
  • goods you hired or loaned to customers
  • business goods used for personal reasons
  • goods bartered, part-exchanged or given as gifts
  • certain services received from abroad that you had to reverse charge
  • certain building work over 100,000 pounds your business did for itself

A common mistake is to forget zero-rated sales. They count towards the threshold even though the VAT rate is 0%.

If you only sell VAT exempt or out of scope goods and services, HMRC says you do not have to register.

If you go over temporarily

If your turnover goes over the threshold only temporarily, you can apply to HMRC for a registration "exception". HMRC will decide and write to you. If it refuses, it will register you.

Voluntary registration

You can choose to register even if your turnover is below 90,000. pounds Some businesses do this to reclaim VAT on purchases, or because their customers are mostly VAT-registered businesses that can reclaim the VAT they are charged. Others prefer to stay unregistered because their customers are members of the public who cannot reclaim VAT, so prices would effectively rise. Which way suits you depends on your customers, costs and plans, which is why this is a good conversation to have with an accountant.

Late registration

HMRC says that if you register late, you must pay VAT on any sales you have made since the date you should have registered, and you might have to pay a penalty depending on how much you owe and how late you are. If you did not charge your customers VAT during that time, the cost may come out of your own pocket. This is the strongest reason to keep a monthly eye on your rolling turnover.

What changes once you are registered

Charging VAT

HMRC's guidance on charging VAT explains that you must charge VAT on the goods and services you sell unless they are exempt. There are three rates:

  • Standard rate, currently 20%, for most goods and services
  • Reduced rate, currently 5%, for certain goods and services, such as domestic fuel or power and child car seats
  • Zero rate, 0%, for certain goods and services including many exports

Rates can change, and HMRC says you must apply any change from the date it takes effect. Check the current VAT rates for your goods and services.

VAT invoices

Your invoices must include your VAT number and show the VAT separately. HMRC sets out what a VAT invoice must include.

Making Tax Digital for VAT

HMRC says all VAT-registered businesses should now be signed up for Making Tax Digital for VAT. That means keeping digital VAT records and submitting VAT returns through compatible software.

VAT returns

Most businesses submit a VAT return every quarter, showing the VAT charged on sales and the VAT reclaimed on purchases.

VAT accounting schemes

HMRC offers schemes that may simplify VAT for smaller businesses. The thresholds to join and leave are:

| Scheme | Join if turnover is | Must leave if turnover is over | | --- | --- | --- | | Flat Rate Scheme | 150,000 pounds or less | 230,000 pounds | | Cash Accounting Scheme | 1.35 million pounds or less | 1.6 million pounds | | Annual Accounting Scheme | 1.35 million pounds or less | 1.6 million pounds |

Briefly:

  • Flat Rate Scheme: you pay a fixed percentage of your VAT-inclusive turnover, with the percentage depending on your business type. You generally cannot reclaim VAT on most purchases.
  • Cash Accounting Scheme: you pay VAT when your customers pay you, and reclaim VAT when you pay suppliers, which can help with cash flow.
  • Annual Accounting Scheme: you make advance payments during the year and submit one return.

Each scheme has conditions, so read the detailed GOV.UK guidance before joining.

Deregistering

If your taxable turnover drops below 88,000, pounds HMRC says you can choose to cancel your VAT registration. This is optional, not automatic.

A simple VAT habit

At the end of every month, add up your taxable turnover for the previous 12 months. If it is getting close to 90,000, pounds speak to your accountant before you cross it, not after. Good bookkeeping software or a simple linked spreadsheet can do this calculation automatically.

How we can help

We are not tax advisers. What we can do is help you set up the admin that makes VAT easier to manage, such as automatic turnover tracking, invoice templates and reminders, through our AI automation work. Get in touch if that would be useful.

Frequently asked questions

Is the VAT threshold based on profit or turnover?

Turnover. It is the total value of your taxable sales, not your profit.

Do zero-rated sales count towards the threshold?

Yes. HMRC includes zero-rated goods in taxable turnover.

Is the threshold checked over the tax year?

No. It is a rolling 12-month test, checked at the end of each month.

Can I register before I reach the threshold?

Yes, voluntary registration is allowed. Whether it makes sense depends on who your customers are and what you buy.

What happens if I register late?

HMRC says you must pay VAT on sales since the date you should have registered and may face a penalty.