When a small business must register for VAT
How the VAT registration threshold is measured, the deadlines for registering with HMRC, and the simplified schemes that can make VAT easier to run.
VAT registration catches many growing businesses by surprise. The rules are not complicated, but the test runs continuously rather than once a year, and missing the moment can leave a business owing VAT it never charged its customers.
This is general information. An accountant can advise on your own circumstances.
The threshold test
A business must register for VAT once its taxable turnover goes over the registration threshold set by HMRC. The current figure is on GOV.UK.
There are two tests, and you need to check both.
The backward look. At the end of every month, add up your VAT taxable turnover for the previous 12 months. If the total is over the threshold, you must register. This is a rolling 12 months, not your accounting year or the tax year.
The forward look. If you expect your taxable turnover in the next 30 days alone to go over the threshold, you must register straight away. This usually applies when a business wins a single large contract.
Taxable turnover means the total value of sales that are not exempt from VAT. It includes sales charged at the standard rate, the reduced rate and the zero rate. Sales that are exempt, such as most insurance and some types of education and health services, do not count. The test applies to the business as a whole, not to each product line.
The deadlines
Under the backward look, you have 30 days from the end of the month in which you went over the threshold to register. Your registration then takes effect from the first day of the second month after you went over.
Under the forward look, you must register by the end of that 30-day period, and registration takes effect from the start of it.
From your effective date of registration, you must charge VAT on taxable sales, whether or not you have yet received your VAT number. If you register late, HMRC can ask for the VAT you should have charged from the date you should have registered, plus a possible penalty. That money often has to come out of the business's own pocket, because it is too late to add it to customers' invoices.
Most businesses register online through their HMRC business tax account.
Registering voluntarily
Businesses below the threshold can still choose to register. The main advantage is being able to reclaim VAT on business purchases. This can make sense for a business that mainly sells to other VAT-registered businesses, which can reclaim the VAT they are charged, or one that sells zero-rated goods but buys standard-rated supplies.
For businesses selling to the public, registering means prices either go up by the VAT or margins fall, so the decision deserves careful thought.
Once you are registered
All VAT-registered businesses must keep digital records and file returns through compatible software under Making Tax Digital. HMRC also offers schemes that can reduce the administration:
- Flat Rate Scheme. You pay a fixed percentage of your gross turnover to HMRC, with the percentage depending on your trade, and generally cannot reclaim VAT on purchases.
- Cash Accounting Scheme. You account for VAT when you are paid and when you pay suppliers, rather than when invoices are issued. This helps cash flow if customers pay slowly.
- Annual Accounting Scheme. You make advance payments through the year and file one return at the end of it.
Each scheme has its own turnover limits and conditions, which are set out on GOV.UK.
If turnover falls below the deregistration threshold, which is set slightly lower than the registration figure, a business can ask to cancel its registration. It must also deregister if it stops trading or stops making taxable supplies. VAT may be due on stock and assets held at the point of deregistration, so check the rules before applying.
