Once you pass the threshold you must register, but below it the choice is yours. Here is how to weigh up registering early against staying unregistered.
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You must register for VAT once your taxable turnover passes the threshold, currently 90,000 pounds in any rolling twelve month period. Below that, registering is voluntary, and whether it helps depends on who your customers are and what you buy.
Here is a balanced view so you can decide, and we are happy to run the numbers for your business.
Staying unregistered often suits you when you sell mostly to the public or other unregistered customers who cannot reclaim VAT, and you have low VATable costs. Adding VAT would simply make you more expensive.
Registering can suit you when you sell mainly to VAT registered businesses, who can reclaim the VAT, or when you have significant VATable costs to reclaim. It can also help you look established. Once you pass the threshold it is required anyway.
If most of your customers are the public, staying unregistered until you must register is often best. If you sell mainly to businesses, or you have large VATable costs, voluntary registration can pay off. The numbers and your customer mix decide it, so it is worth a quick review before you choose.
Once taxable turnover for the rolling last 12 months passes £90,000, or you expect to pass it in the next 30 days alone, registration is compulsory. Below that, you can choose.
The deregistration threshold is £88,000. Both figures have applied since 1 April 2024.
Everything else is detail. There are really only two situations.
If you sell mainly to VAT registered businesses, registration is close to free. You add 20%, they reclaim it, and it costs them nothing. Meanwhile you start reclaiming VAT on your own costs. For most business to business suppliers, voluntary registration is a straightforward gain.
If you sell mainly to the public, registration is a real 20% problem. Your customer cannot reclaim anything. You either raise prices by a fifth and become less competitive, or hold prices and take a fifth off your own margin. On £80,000 of consumer sales, absorbing it costs roughly £13,300 a year.
Registration is not one directional. From your effective date you reclaim VAT on stock, equipment, fuel, software, professional fees and most other costs.
On your first return you can also go back: 4 years for goods you still hold and use, such as stock, tools and equipment, and 6 months for services. A trade that has recently bought a van and tools can recover several thousand pounds this way, and it is regularly missed.
Quarterly returns. Digital record keeping under Making Tax Digital, which applies to every VAT registered business whatever the size. Filing from software rather than typing into the HMRC website. And moving data between systems by digital link, not copy and paste.
There is also the discipline of setting the VAT aside. The commonest cash flow failure in small businesses is spending VAT collected on behalf of HMRC and then finding the quarter end has arrived.
You can join if you expect taxable turnover of £150,000 or less excluding VAT, and you must leave once income including VAT exceeds £230,000. You charge normal VAT but pay HMRC a flat percentage of gross takings, and generally do not reclaim input VAT.
Check the limited cost business test first. If you spend less than 2% of your flat rate turnover on goods, or more than 2% but under £1,000 a year, your rate is 16.5% regardless of trade. For most consultants and service businesses that is worse than standard VAT, because you have also given up input VAT recovery.
Deliberately staying under the threshold is legal. Trading fewer days, turning work away, closing for a period. Plenty of businesses do it.
Artificial separation is not. Splitting one business into two so each sits under £90,000 is something HMRC can and does challenge. It can issue a direction treating connected businesses as a single entity, backdated, with the VAT and penalties following. The test looks at financial, economic and organisational links, not at what the paperwork says.
If you are approaching the threshold and sell to consumers, the real question is not whether to register but what to do about pricing. Raising prices gradually before you cross is usually less damaging than a 20% jump on the day you register. And if a good share of your customers are businesses, the pain is smaller than you think.
Work out what proportion of your sales go to VAT registered customers. Add up the VAT you are currently paying on costs and cannot reclaim. If most of your customers reclaim, register now. If they do not, and the VAT on your costs is small, stay out until you have to and plan the pricing.
Tell us a little about your situation and we will give you a straight, no obligation steer, then a fixed fee if you want us to handle it.