What is the VAT threshold and when do you need to register for VAT?

Understanding the VAT threshold is a crucial part of getting your small business accounting in order. VAT is a tax charged by VAT-registered businesses on most goods and services in the UK (and some services that are imported from other EU countries.)

A common question business owners ask themselves is do I need to register for VAT? And the answer depends mostly on turnover.

If your taxable turnover has exceeded £90,000 (the new threshold in place since 1st April 2024) you’ll need to become a VAT-registered business. This means you must charge customers VAT on top of the sales price of your goods or services, and submit regular VAT returns to HM Revenue & Customs.

You can also become a VAT-registered business voluntarily to obtain some of the benefits. For instance, if a VAT-registered business is charged VAT when it buys goods or services, it can generally reclaim the VAT it has incurred.

But the real question here is — when should you do all of this? Don’t worry, we’ll cover all you need to know below.

Don’t miss a detail when doing your VAT returns – especially since the ruling of the new ‘Making Tax Digital‘ laws, you’ll need to choose accounting software you can rely on. We’ve reviewed a few of the best below:

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What is the VAT threshold for compulsory VAT registration?

The current VAT registration threshold is £90,000. This changed on 1st April 2024, and represents a £5,000 rise over the previous threshold of £85,000.

A business must register for VAT if its taxable turnover for any consecutive 12-month period exceeds the VAT registration threshold.

Another common reason why a business may be forced to register for VAT is if it takes over an existing business that is VAT-registered. The test is if the taxable turnover of the purchaser for the last 12 months added to the turnover of the business being purchased is over the VAT registration threshold – if the answer is yes, then the business is obliged to register.

There is also an obligation to register for VAT if you think your business’ turnover will exceed the threshold within just 30 days, but for most businesses, this would not apply. There are other scenarios when VAT registration becomes compulsory, for instance if you are trading outside of the UK.

Failure to register on time may lead to late registration penalties and/or ‘failure to notify’ penalties. What’s more, surcharges and interest are likely to be charged for late payment if the business has a VAT liability. If your business’ turnover exceeds the VAT threshold temporarily, you can ask HMRC for an exception from registration.

Voluntary VAT registration

If the taxable turnover of your business does not exceed the current VAT registration threshold, you can still register for VAT voluntarily.

There are two main reasons why a business might opt to register for VAT:

1. Customers are predominately other VAT-registered businesses and therefore any VAT they are charged can be recovered, so it makes no difference to their customers whether they are VAT registered or not
2. They are often in a refund position with HMRC, so the business is actually better off being VAT registered.

Who cannot register for VAT?

An entity cannot register for VAT if it does not meet the definition of a business as stated by HMRC for VAT purposes.

A business is also prohibited from registering if it tends to sell only goods or services that are exempt from VAT.

Always consider the customer when registering for VAT…

Let’s explain the first point in more detail, using a retailer as an example:

If a retailer’s customers are generally other VAT-registered businesses, they will not mind whether they are charged VAT, because they can obtain a refund from HMRC.

So the business is probably better off registering for VAT because it can recover the VAT on its purchases. And this tactic isn’t at all risky or dishonest – it’s estimated that around 20% of all VAT-registered businesses trade below the VAT registration threshold.

However, if a retailer’s customers are the general public (who are not VAT-registered), then they cannot recover the VAT. Therefore, the VAT is an additional cost to the public and inflates the retail price, so think carefully about whether you have to charge VAT. If the retailer’s rivals are not VAT-registered, its prices won’t be as competitive.

The different VAT rates

To illustrate point two, let’s look at the different categories items fall into for VAT purposes:

Farming is an industry where VAT refunds often occur. Their direct purchases are mostly zero-rated and so are their sales. However, any VAT they incur on other expenses such as overheads or equipment can be recovered – hence the refund position.

Other examples of businesses that may wish to register for VAT voluntarily might include a green grocers or a children’s shoe shop. Again, their sales and direct purchases will generally be zero-rated, however, if they incur any overheads, legal fees or equipment, they should be able to recover any VAT they’ve been charged on these purchases.

Choosing a VAT scheme

Once you’ve established when to register for VAT, you’ll want to consider the most appropriate VAT scheme for your business. There are three main options:

VAT flat rate scheme

This is only eligible for businesses with less than £150,000 (of taxable turnover – this is the total of everything you’ve sold that isn’t VAT exempt). The scheme is designed to make record keeping more simple for small businesses by allowing you to apply a fixed-rate percentage to turnover, dependent on industry.

For more detailed information from HMRC, click here.

VAT cash accounting scheme

Another popular choice for start-ups and small businesses (turnover must be less than £1.35m), in this scheme you only have to pay VAT on your sales once you have received payment from your customers. Likewise you only reclaim VAT on any purchases you make once you have paid your supplier.

Typically, outside of this scheme VAT payments are due to HMRC regardless of whether your invoices have been paid yet, which can cause cashflow issues.

You cannot use the cash accounting scheme in conjunction with the VAT flat rate scheme.

Annual accounting scheme

Rather than filing your return each quarter, this scheme allows businesses to submit one annual return, as well as making advance payments (using estimated amounts based on the previous year’s return) throughout the year.

Once you’ve completed your return, you can then either make a final payment (to cover any shortfall between your advance payments and the final bill) or apply for a VAT refund if you’ve overpaid.

For more information on VAT registration, check out part two of this guide: How to register for VAT