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

Registering for VAT is a crucial part of getting your small business accounting software in order.

If your taxable turnover exceeds £90,000, you’ll need to become VAT-registered.

But the question now is, when should you do all of this?

You must register for VAT if your taxable turnover exceeds the threshold in the next 12 months, or you expect it to go over this amount in the next 30 days. You can also register voluntarily, so that you can reclaim VAT incurred on goods and services.

In this article, we’ll guide you through everything you need to know about when to register for VAT, including the current VAT threshold, the different VAT rates, and how to choose the right VAT scheme for your business.

What is VAT?

VAT — short for value-added tax — is a tax that’s added to most products and services offered by VAT-registered businesses. For consumers, it’s a tax added to the price of the things they buy.

How it works is simple. First, a business buys raw materials, and will pay VAT on that purchase. Next, when they sell the goods or services, they’ll add the VAT as an extra charge on top of the original price. From there, they’ll pay the Government the difference between the VAT collected from customers and the VAT they paid on business expenses.

In the UK, businesses must be VAT-registered when they’re taxable turnover exceeds the threshold. If you need help, read our guide on how to register for VAT to get the essential information you need.

What is the threshold for compulsory VAT registration?

The current VAT registration threshold is £90,000. This changed on 1st April 2024, meaning the threshold is now £5,000 more than the previous £85,000.

A business must register for VAT if its taxable turnover is more than the VAT threshold for any consecutive 12-month period. You must also register if you expect your turnover to exceed this amount in the next 30 days.

Another common reason why businesses may have to register is if they take over an existing VAT-registered business. If the taxable turnover of the purchaser for the last 12 months, plus the turnover of the business being purchased, is over the threshold, then the purchasing business must register.

Outside of this, there are a few other scenarios when VAT registration becomes necessary. For instance, if you’re trading outside of the UK.

What happens if I don’t register on time?

If you don’t register for VAT on time, you might have to pay a late registration penalty and/or a “failure to notify” penalty.

What’s more, surcharges and interest are likely to be charged for late payment if the business has a VAT liability. If your business’s turnover exceeds the VAT threshold temporarily, you can ask HMRC for an exception from registration.

Can you voluntarily register for VAT?

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

The common reasons why a business might opt to register for VAT include:

• VAT can be reclaimed on most goods and services that the business purchases.
• If a company’s customers are mainly VAT-registered businesses, they can also reclaim any VAT that is charged.
• It gives small businesses the appearance of being more established, which can be appealing to customers, lenders, investors, and suppliers.
• It pushes small businesses to keep more accurate records, which can help keep things running smoothly.

B2B vs B2C: why does it matter for VAT?

Unless it is mandatory, businesses should think about their customers before choosing to register for VAT.

For B2B businesses, it won’t have a major effect on clients. As mentioned earlier, if a company’s customers are generally other VAT-registered businesses, they won’t mind if they’re charged VAT, because they can reclaim it from HMRC later on.

On the other hand, B2C businesses will have to charge VAT on products/services to the general public, who aren’t VAT-registered. This means that the VAT would be an additional cost and would inflate the retail price. Also, if the business’s competitors aren’t VAT-registered, customers may be more drawn to their prices instead.

What are the different VAT rates?

The most common VAT rate in the UK is 20%. However, certain goods and services are marked lower, or even exempt from VAT completely. Here’s a quick overview of the different categories:

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 scheme is only eligible for businesses with less than £150,000 of taxable turnover. It is designed to make record keeping simpler 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 startups and small businesses, but it is only accessible for those with a turnover of 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.

However, you still have to pay HMRC, even if the invoices haven’t been paid yet, which can risk cashflow issues. You also 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 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.

Conclusion

You must register for VAT if your taxable turnover exceeds £90,000 in the next 12 months, or you expect that it’ll hit this amount in the next 30 days.

But even when it’s not mandatory, registering for VAT can have its perks. You can reclaim it on most goods and services, and even come across as more established, attracting customers, investors, or lenders.

Either way, a good accounting software can be a lifesaver when managing VAT. Not only can it save serious admin time by automating VAT calculations and correcting VAT rates, but it can also ensure you remain compliant with the UK’s Make Tax Digital (MTD) regulations.

Need help finding the right software? Check out our guide on the best accounting software for small businesses for our top choices, including features, pricing, and who it’s best suited for.