Understanding VAT: When to Register and Why

VAT registration is one of the biggest steps a growing UK business takes. Once you have a VAT number, VAT runs through every sale you make and every invoice you pay. Some businesses have no choice because their turnover has gone over the limit; others register voluntarily because it saves them money. This guide explains how VAT works, when VAT registration is compulsory, when it is worth doing early, and what changes once you are registered.

How VAT works in plain English

Value Added Tax is a tax on consumer spending, collected by businesses on HMRC's behalf. A VAT-registered business adds VAT to the price of what it sells (output VAT) and pays VAT on what it buys (input VAT). Every quarter, it pays HMRC the difference.

Say you sell a service for £1,000 plus VAT at 20%. Your customer pays you £1,200 and £200 of that is output VAT. In the same quarter you buy equipment for £300 plus £60 VAT. Your VAT return shows £200 collected and £60 reclaimable, so you pay HMRC £140.

The result is that VAT is only a real cost to the final consumer. For a business, it mostly passes through, which is why VAT registration affects cash flow and pricing more than profit.

The three VAT rates

• Standard rate, 20%: most goods and services.
• Reduced rate, 5%: some goods and services, such as domestic fuel and children's car seats.
• Zero rate, 0%: items such as most food and children's clothes. These are still taxable supplies, just at 0%.

Some supplies are exempt, such as most insurance, finance and education. Exempt sales are outside VAT altogether, and a business that only makes exempt sales cannot register.

When VAT registration is compulsory

VAT registration becomes compulsory when your VAT taxable turnover goes over the threshold of £90,000. HMRC uses two tests:

1. Looking back: your taxable turnover for the last 12 months, checked at the end of every month, goes over £90,000. You must register within 30 days of the end of that month.
2. Looking ahead: you expect your taxable turnover to go over £90,000 in the next 30 days alone. You must register by the end of those 30 days.

There is no threshold for businesses based outside the UK that make taxable supplies here: they must register from their first UK sale. Our guide to the VAT registration threshold walks through both tests with examples, including the effective date you must start charging VAT from.

Why register for VAT voluntarily?

You can apply for VAT registration at any turnover. For the right business, registering early is a clear win.

Your customers are VAT-registered

If you sell mainly to other VAT-registered businesses, the VAT you charge them is reclaimable on their own returns. Adding 20% to your invoices costs them nothing in the end, while you gain the right to reclaim VAT on your own costs.

You have high VAT-able costs

A business that buys equipment, stock, software or subcontracted services with VAT on them can reclaim that VAT once registered. In the early months, when spending often runs ahead of sales, that can mean refunds from HMRC.

You sell zero-rated goods

If your sales are zero-rated, you charge no VAT to customers but can still reclaim VAT on costs. Many zero-rated businesses register voluntarily for exactly this reason and receive regular repayments.

Credibility with larger clients

Some larger organisations prefer suppliers with a VAT number, because it suggests an established business. It is not a legal requirement, but it can matter when you tender for work.

When voluntary VAT registration is a bad idea

VAT registration is not right for every small business. Think carefully before registering early if:

• Most of your customers are members of the public. They cannot reclaim VAT, so you would either raise prices by 20% and risk losing sales, or keep prices the same and lose a sixth of your income to HMRC.
• Your costs carry little VAT. Service businesses run from home, with few purchases, have little VAT to reclaim.
• You want to keep admin to a minimum. VAT means quarterly returns, digital records and deadlines, with penalties for late filing and late payment.

Once you register, HMRC normally expects you to stay registered for at least two years, so it is not a decision to make on a whim. A quick comparison of your likely VAT charged and VAT reclaimed usually gives a clear answer.

What you need for VAT registration

Most businesses apply online through their HMRC business tax account. Have these details ready:

• your business name, address and bank details
• your Unique Taxpayer Reference (UTR), and your company registration number if you are a limited company
• your National Insurance number (for a sole trader or partner)
• your turnover for the last 12 months and an estimate for the next 12
• a description of your business activity

HMRC issues a VAT registration certificate with your VAT number and your effective date of registration. Our step-by-step guide to the VAT registration process covers each screen of the application.

What changes after VAT registration

Charging VAT and issuing VAT invoices

From your effective date, you must charge VAT on taxable sales and issue VAT invoices to VAT-registered customers. A VAT invoice must show your VAT number, the invoice date, a unique number, the VAT rate and the VAT amount, among other details.

Making Tax Digital

Every VAT-registered business must keep digital records and file VAT returns through software that works with Making Tax Digital (MTD). Spreadsheets are allowed only with bridging software that sends the return to HMRC.

VAT returns and payments

Most businesses file a return every quarter. The return and the payment are due one calendar month and seven days after the end of each VAT period. Late returns earn penalty points, and late payments attract penalties and interest. We explain the rules in our guide to VAT return deadlines and penalties.

VAT schemes that make life easier

At the point of VAT registration, you can also apply for a scheme:

• Flat Rate Scheme for businesses with taxable turnover up to £150,000: you pay a fixed percentage of your gross takings, set by your trade.
• Cash accounting for taxable turnover up to £1.35 million: you account for VAT when you are paid and when you pay, not when invoices are raised.
• Annual accounting for taxable turnover up to £1.35 million: one return a year, with interim payments.

Each scheme has its own rules, and the Flat Rate Scheme in particular suits some trades far better than others. Ask before you sign up.

Leaving VAT registration later

If your taxable turnover is expected to fall below the deregistration threshold of £88,000 in the next 12 months, you can ask HMRC to cancel your VAT registration. You must also deregister if you stop trading or stop making taxable supplies. When you deregister, you may owe VAT on stock and assets you still hold, so plan the timing.

Common VAT registration mistakes

Most VAT problems we see start at registration. These are the ones worth avoiding.

Checking turnover once a year

The threshold test is a rolling 12 months, checked every month. A business that only looks at its turnover when the annual accounts are prepared can find it crossed the line many months earlier, and owes VAT on every sale since the date it should have registered.

Leaving out zero-rated sales

Zero-rated sales count towards the threshold even though no VAT is charged on them. Leaving them out is one of the most common reasons businesses register late.

Picking the wrong effective date

Your effective date of registration decides when you must start charging VAT. Choose a date that is too late and HMRC will correct it, leaving you to pay VAT you did not collect. Choose one too early by mistake and you may have to reissue invoices.

Joining the Flat Rate Scheme without doing the sums

The Flat Rate Scheme looks simple, but businesses that spend little on goods can be classed as limited cost traders and pay a higher flat rate of 16.5%. For some service businesses that makes the scheme more expensive than standard VAT accounting.

Forgetting pre-registration VAT

You can usually reclaim VAT on goods bought up to four years before registration, if you still have them, and on services bought up to six months before. Many new registrations miss this money because the invoices were not kept.

VAT registration: the short version

• VAT registration is compulsory once taxable turnover goes over £90,000 on a rolling 12-month basis, or will do in the next 30 days.
• Voluntary registration often pays for businesses selling to other businesses, or with high VAT-able costs.
• It rarely pays for businesses selling mainly to the public.
• Once registered, you charge VAT, keep digital records and file returns under Making Tax Digital.

HMRC's full guidance is in VAT Notice 700/1: should I be registered for VAT? on GOV.UK.

Get your VAT registration done right

Not sure whether to register now or wait? We can look at your sales and costs, tell you whether VAT registration makes sense, and handle the whole application with HMRC. See our VAT registration service to get started.