Value Added Tax (VAT) is a tax on the supply of goods and services in the UK, currently charged at 20% (standard rate). Once a business crosses the VAT registration threshold, it must register with HMRC. But many businesses choose to register voluntarily long before they reach that threshold. Understanding when and why to register is essential for effective business planning.
The VAT Registration Threshold
For 2024/25, the VAT registration threshold is £90,000. This means if your VAT-taxable turnover in the preceding 12 months exceeds £90,000, or you reasonably expect it to exceed £90,000 in the next 30 days alone, you must register for VAT.
Taxable turnover includes all supplies made at the standard rate (20%), reduced rate (5%), and zero rate (0%). It excludes exempt supplies (such as insurance, postage stamps, and some financial services) and supplies outside the scope of UK VAT.
You must register within 30 days of exceeding the threshold. If you fail to register on time, HMRC can backdate the registration and charge VAT on all supplies you should have been charging from the date you were required to register.
Voluntary VAT Registration
There is no rule that says you must wait until you reach the threshold. You can register for VAT at any time, even before you make your first sale. Voluntary registration can make sense in a number of situations.
First, if your customers are mostly VAT-registered businesses, they will reclaim any VAT you charge anyway — so adding 20% to your invoices costs them nothing, but you get to reclaim VAT on your own purchases. Second, voluntary registration can enhance your professional image and signal that your business has scale. Third, if you make significant purchases of equipment, stock, or services with VAT on them, reclaiming that input tax can be a meaningful cash benefit.
- Your business-to-business (B2B) customers are primarily VAT registered — they reclaim the VAT you charge
- You have high input costs (equipment, components, professional services) on which you pay VAT
- You want to present your business as an established, credible operation
- You are in a sector where clients expect VAT-registered suppliers
VAT Schemes for Small Businesses
HMRC offers several VAT accounting schemes designed to simplify administration or improve cash flow for smaller businesses. The most widely used is the Flat Rate Scheme.
Under the Flat Rate Scheme (FRS), you charge your customers the standard 20% VAT but pay HMRC a flat rate percentage of your gross (VAT-inclusive) turnover. The percentage varies by industry — for example, IT consultants pay 14.5%, management consultants pay 14%. You keep the difference. This can reduce your VAT bill and simplifies record-keeping because you do not need to track input VAT on individual purchases.
The Cash Accounting Scheme lets you account for VAT based on when you receive payment, not when you invoice. This improves cash flow if your customers are slow payers. The Annual Accounting Scheme allows you to submit just one VAT return per year and pay by instalments.
How to Register for VAT
You register for VAT online through the HMRC VAT registration service (via your Government Gateway account). The process typically takes 10 working days, though it can be longer during busy periods. You will receive a VAT registration number and a VAT certificate.
From your effective date of registration, you must charge VAT on taxable supplies, issue VAT invoices, maintain a VAT account, submit periodic VAT returns (usually quarterly), and pay any VAT due to HMRC by the deadline. Making Tax Digital (MTD) rules require most VAT-registered businesses to keep digital records and submit returns using compatible software.
Deregistering from VAT
You can deregister if your taxable turnover falls below the deregistration threshold, which is £88,000 for 2024/25. You may also deregister if you stop making taxable supplies. You must deregister immediately if you stop trading and making taxable supplies.
When you deregister, you must account for VAT on any business assets you hold (including stock and equipment) on which you originally claimed input VAT, if the VAT on those assets is more than £1,000 in total. This is called the "deregistration VAT charge".
Frequently Asked Questions
Does the VAT threshold apply to turnover or profit?
The VAT threshold applies to taxable turnover — the total value of sales of VAT-taxable goods and services — not profit. Even if your business makes no profit, if your taxable sales exceed £90,000 in 12 months (or are expected to in 30 days), you must register.
Do I need to charge VAT on all my sales once registered?
Only on taxable supplies. Some goods and services are zero-rated (such as most food, children's clothing, and books) or exempt (such as insurance and residential property rental). Zero-rated supplies count towards your taxable turnover but are charged at 0%. Exempt supplies do not require VAT to be charged and do not count towards your taxable turnover.
What is Making Tax Digital for VAT?
Making Tax Digital (MTD) requires VAT-registered businesses to keep digital records and submit VAT returns using HMRC-compatible accounting software. MTD applies to all VAT-registered businesses. You cannot submit VAT returns manually via HMRC's old online portal unless you have a specific exemption.
Can I reclaim VAT on purchases I made before registering?
Yes, subject to limits. You can reclaim VAT on goods bought within 4 years before registration (provided you still hold them) and services bought within 6 months before registration, as long as these were for business purposes and the goods or services have not been consumed or sold before registration.
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