For some small businesses, hitting certain milestones can bring new responsibilities, and VAT registration may be one of them. While some businesses must register once their taxable turnover reaches the £90,000 threshold, others are also permitted to register voluntarily if it makes commercial sense.
But when it comes to VAT registration UK, what does it mean for your business, and how do you know whether registering is the right decision? This guide answers these questions and explains what you need to know before registering.
Note: VAT rules can depend on the nature of the business, supplies made and specific transactions involved.
Key Takeaways
- VAT registration UK is necessary if a small business has a taxable turnover of over £90,000 in 12 months or exceeds the turnover if they get a new contract within 30 days.
- VAT turnover is the value of sales or other transactions that counts toward the VAT threshold.
- VAT registration is mandatory and voluntary. It’s voluntary for those who choose to register for often to reclaim VAT on eligible business purchases or because it benefits their business dealings.
When Do You Need to Register for VAT in the UK?
According to HMRC, you must register for VAT when your business meets certain conditions. This is usually based on the amount of taxable turnover your business generates.
There are three main situations where you may need to register:
Your Taxable Turnover Exceeds £90,000 in 12 Months
The VAT registration threshold for businesses is more than £90,000. This threshold is based on your taxable turnover over the previous 12 months, rather than your profit.
If your taxable turnover goes over £90,000, you have 30 days from the end of the month in which you exceeded the threshold to register for VAT.
For example, if your taxable turnover goes over £90,000 on 21 July, you must register by 30 August. Your VAT registration will then start from 1 September.
You Expect Your Turnover to Exceed £90,000 in the Next 30 Days
Let’s say your taxable turnover is currently £85,000 and you receive a £20,000 contract that you expect to complete within the next 30 days. This would take your taxable turnover above £90,000.
As soon as you realise this will happen, you must register for VAT. The date you realise this becomes your effective date of VAT registration, rather than the date your turnover actually goes above £90,000.
For example, if you receive the contract on 10 September and realise on that day that it will take your taxable turnover above £90,000 within the next 30 days, 10 September becomes your effective date of registration.
Other Situations Where VAT Registration UK Isn’t Just About the Threshold
The £90,000 threshold does not apply to every business in the same way. You may need to register for VAT even if your taxable turnover is below the threshold if:
- Your business is based outside the UK and you supply goods or services to the UK.
- You take over a VAT-registered business and the combined taxable turnover of the businesses is above the registration threshold.
- You are based in Northern Ireland and buy more than £90,000 worth of goods from EU VAT-registered suppliers for your business, even if you only make VAT-exempt sales or sales that are not covered by VAT rules.
What Counts Towards the VAT Registration Threshold?
Not all the money your business receives will count towards the VAT registration threshold. To work out whether you need to register, you need to know which sales and other transactions HMRC includes in your taxable turnover.
What Is VAT-Taxable Turnover?
VAT-taxable turnover is the total value of the sales and other transactions that count towards the VAT registration threshold. It includes:
- Zero-rated goods and services – taxable sales charged at 0% VAT.
- Reduced-rated goods and services – taxable sales charged at 5%.
- Standard-rated goods and services – taxable sales charged at the standard 20% VAT rate.
- Goods hired or loaned to customers.
- Business goods used for personal reasons.
- Goods bartered, part-exchanged or given away as gifts.
- Certain services received from businesses in other countries that require the reverse charge.
- Goods and services subject to the domestic reverse charge.
- Certain building work worth more than £100,000 that your business carries out for itself.
What Doesn’t Count Towards VAT Taxable Turnover?
There are certain goods and services you can’t charge VAT on. These include:
Exempt Goods or Services
Even if you can’t charge VAT on these categories but you buy or sell them, you’re still to record the transaction in your general business accounts. Some examples of these goods or services are:
- Antiques
- Charity Events
- Sports Activities
- Gambling or Lottery Tickets
- Funeral Plans, Burial, or Cremation Services
- Financial Services, Investments, and Insurance
- Education and Training excluding private schools
It’s worth noting that VAT-registered businesses can charge charities zero or reduced-rate VAT on certain goods and services where the relevant conditions are met. This is separate from the VAT exemption for qualifying fundraising events.
Out of Scope Goods or Services
Outside-the-scope goods and services are transactions that fall outside the UK VAT system, so VAT does not apply to them. Examples include:
- Goods or services you buy and use outside the UK
- Certain statutory fees, such as the London Congestion Charge
- Goods sold as part of a hobby, such as stamps from a personal collection
- Donations to charities where nothing is received in return
Can You Register for VAT Below the Threshold?
Yes. You can apply for VAT registration below the threshold if your taxable turnover is less than the £90,000 VAT registration threshold.
What Is Voluntary VAT Registration?
Voluntary VAT registration is when a business registers for VAT even though its taxable turnover is below the compulsory registration threshold.
Once registered, the business generally has the same VAT responsibilities as one that is required to register. This includes charging VAT on taxable sales, keeping VAT records and submitting VAT Returns.
Benefits of Voluntary VAT Registration
Voluntary VAT registration may benefit your business because:
- You can reclaim eligible VAT on purchases and expenses used to make taxable supplies.
- It may work well for B2B businesses, as VAT-registered customers can generally reclaim the VAT you charge them.
- It can help you prepare for compulsory registration by allowing you to put your VAT records and processes in place earlier.
- It may be useful if your business has significant VATable costs, such as equipment, stock or materials, because you may be able to reclaim the VAT on eligible purchases.
Disadvantages of Voluntary VAT Registration
- You generally have to charge VAT on your taxable sales, which can make your prices higher for customers who cannot reclaim VAT.
- You may have to absorb the VAT instead of increasing your prices, which can reduce your profit margin if you’re selling to price-sensitive customers.
- You have additional VAT compliance responsibilities, including keeping required records, issuing proper VAT invoices and submitting VAT Returns.
- You need to manage VAT cash flow, because the VAT you collect is not all yours to keep; you may need to pay the net amount due to HMRC after accounting for eligible input VAT.
- You cannot simply cancel the registration whenever you want without meeting HMRC’s conditions. There are rules around cancelling VAT registration, including the voluntary deregistration threshold.
Is Voluntary VAT Registration UK Right for Your Business?
The decision can depend on who you sell to, how much VAT you pay on business costs and whether your prices can absorb or pass on VAT.
If you mainly sell to VAT-registered businesses, voluntary registration may have less impact on your customers because they may be able to reclaim the VAT. However, if you mainly sell to consumers, adding VAT could make your prices more expensive and affect demand.
If your business has significant VATable costs, such as equipment, stock or materials, the VAT you could reclaim may also make voluntary registration worth considering.
Ultimately, being allowed to register voluntarily does not automatically mean that you should. You need to weigh the potential VAT you can reclaim against the VAT you will charge, the effect on your pricing and the additional administration involved.
What Happens After You Register for VAT?
Once your VAT registration UK application is approved, you will receive a VAT registration number and confirmation of your effective registration date.
From this date, your VAT responsibilities begin. You generally need to charge VAT on your taxable sales, keep the required VAT records and account for the VAT you collect from your customers.
At the same time, registering for VAT can also allow you to reclaim eligible VAT on business purchases and expenses. These purchases must relate to your taxable business activities, and you will need appropriate evidence, such as valid VAT invoices, to support your claim.
You will also need to report your VAT to HMRC through VAT Returns. These are normally submitted every three months, and under Making Tax Digital for VAT, you must keep digital records and use compatible software to submit your returns unless you qualify for an exemption.
Lastly, your VAT registration does not necessarily have to continue indefinitely. If your taxable turnover later falls below £88,000, you may be able to ask HMRC to cancel your VAT registration.
However, this does not happen automatically; you must apply to HMRC and meet the conditions for cancelling your registration.
What Happens If You Register for VAT Late?
If you were required to complete VAT registration UK but did not tell HMRC on time, HMRC will register you from the date you were liable to be registered. You will then have to account for VAT from that date, even if you did not charge VAT to your customers at the time.
You may be able to offset eligible input VAT against the amount due, subject to the normal rules. You may also have to pay a penalty for failing to notify HMRC on time.
HMRC says the penalty is based on the net VAT due from the date you should have registered until the date HMRC receives your notification or becomes fully aware that you should be registered.
The current HMRC guidance gives penalty rates of 5% if you are less than 9 months late, 10% if you are 9 to 18 months late, and 15% if you are more than 18 months late. However, the exact penalty can depend on the circumstances and applicable rules.
Getting Help With VAT Registration UK
VAT registration can look straightforward. But if your business has unusual transactions or more complex VAT needs, knowing when you need to register or whether voluntary registration makes sense can be less clear.
At Surrey Accountancy Limited, we can help you understand where your business stands and what you need to do next. From assessing your VAT registration position to helping with VAT Returns and Making Tax Digital, our team can provide practical support with your VAT obligations.
Rather than risking costly mistakes with your VAT registration, contact Surrey Accountancy Limited today and let our team help you get it right from the start.
Also Read
- In the construction industry? Find out about the CIS Reverse VAT Charge
- Why Small Businesses Have Cash Flow Problems
Frequently Asked Questions
Can You Back Date a Voluntary VAT Registration?
Yes, HMRC can consider a request to backdate a voluntary VAT registration, but it is not automatic. For an intending trader, HMRC may accept a retrospective effective date.
That’s if you can provide evidence that you had a firm intention to make taxable supplies at the earlier date, and the requested date cannot normally be more than three years before the application.
What are the VAT Return Deadlines in the UK?
Most VAT-registered businesses submit VAT Returns every three months, with the return and payment usually due one calendar month and seven days after the end of the accounting period.
The deadline still applies when it falls on a weekend or bank holiday, so businesses should ensure payment reaches HMRC by the due date.
You can find out when your returns are due here.
How Far Back Can HMRC Check VAT Returns?
HMRC can generally assess underpaid or under-declared VAT going back four years from the end of the relevant accounting period.
However, a 20-year time limit can apply in cases involving deliberate behaviour, failure to notify, certain avoidance schemes or arrangements intended to cause a loss of VAT.
Do Zero-Rated Sales Count Towards the VAT Registration Threshold?
Yes, zero-rated sales count towards your VAT registration threshold because they are included in taxable turnover. HMRC defines taxable turnover as supplies that are not VAT-exempt or outside the scope, including zero-rated, reduced-rated and standard-rated supplies.
What triggers an HMRC VAT investigation?
HMRC can select a business for a compliance check when it identifies potential risks, such as figures that appear incorrect, a large VAT repayment claim compared with turnover, or unusually low tax relative to turnover.
Checks can also be selected using risk analysis, previous late or incorrect VAT Returns, or even randomly, so receiving an investigation does not necessarily mean that HMRC believes you have done something wrong.
