VAT Registration and Thresholds

You are legally required to register for VAT when your taxable turnover exceeds £90,000 in any rolling 12-month period. The rolling 12-month rule means you must check at the end of every month whether your turnover in the preceding 12 months has breached the threshold — it is not based on the tax year. You must also register if you have reasonable grounds to expect your taxable turnover to exceed £90,000 in the next 30 days alone.

Once you exceed the threshold, you have 30 days to notify HMRC. Registration takes effect from the start of the next accounting period or from the day you became liable (if later). Charging VAT before registration or failing to register on time can both attract HMRC penalties.

You can register for VAT voluntarily even if your turnover is below the threshold. Voluntary registration can be worthwhile if your customers are themselves VAT-registered businesses — they can reclaim the VAT you charge, so it does not increase their costs. It also allows you to reclaim VAT on your purchases, which can significantly reduce costs if you have high input costs (e.g. materials or equipment).

However, voluntary registration adds administrative burden: you must keep VAT records, submit regular returns, and use Making Tax Digital (MTD) compatible software. For businesses primarily serving consumers (who cannot reclaim VAT), registration may simply make your prices 20% more expensive relative to unregistered competitors.

You can register voluntarily even if your turnover is below the £90,000 threshold. This can be beneficial if you sell mainly to VAT-registered businesses (who can reclaim the VAT), if you want to reclaim VAT on business purchases and startup costs, or if being VAT-registered gives your business credibility. However, voluntary registration means you must charge VAT on all your sales and submit quarterly returns, which adds administrative burden.

Consider the Flat Rate Scheme if you register voluntarily — it simplifies VAT accounting by letting you pay a fixed percentage of your gross turnover to HMRC instead of calculating the difference between output and input VAT. The percentage varies by business sector (for example, 14.5% for computer repair, 6.5% for retailing food). Be aware of the limited cost trader rule: if your goods purchases are less than 2% of turnover or under £1,000, you must use the 16.5% flat rate regardless of sector.

Once registered, you must submit VAT returns — usually every quarter — showing the VAT you have charged (output tax) and the VAT you have paid on purchases (input tax). The difference is paid to or reclaimed from HMRC. Returns and payments are due one calendar month and seven days after the end of each VAT period.

All VAT-registered businesses must use Making Tax Digital (MTD) compatible software to keep digital VAT records and submit returns directly from the software. You cannot manually key figures into the HMRC portal. Penalties under the MTD regime apply for non-compliance. HMRC also operates a VAT Flat Rate Scheme and Cash Accounting Scheme for smaller businesses, which can simplify administration.

HMRC replaced the old surcharge-based VAT penalty regime with a new points-based system for VAT periods starting on or after 1 January 2023. Under the new regime, each late VAT return submission earns a penalty point. Once a business accumulates a set number of points (2 for annual filers, 4 for quarterly filers, 5 for monthly filers), a fixed penalty of £200 is charged for that and each subsequent late submission. Points expire after 24 months of compliance. The new regime is intended to be lighter-touch for occasional lateness while maintaining pressure on persistent non-filers.

Late payment of VAT now attracts a first late payment penalty of 2% of the outstanding amount after 15 days; a second penalty of 2% after 30 days; and a further 4% annual rate beyond 30 days (prorated by day). These replaced the previous default surcharge regime. HMRC also charges interest at the Bank of England base rate plus 2.5% on overdue VAT from the date it was due. If you have a dispute with HMRC about a VAT assessment, you must file a notice of appeal to HMRC (using form VAT656 or the online portal) within 30 days of the decision, and can then proceed to the First-tier Tribunal (Tax) if the internal review does not resolve the matter.

If your taxable turnover falls below the deregistration threshold (currently £88,000), you can apply to deregister for VAT. Deregistration ends your obligation to charge, collect, and remit VAT, but may require you to account for VAT on business assets still held at the date of deregistration (if their value would have generated a VAT charge had they been sold). Consider the implications carefully — particularly if you are partially exempt or have significant capital goods still within their adjustment period — before deregistering.