Value Added Tax (VAT) can surprise business owners. VAT might not be mandatory for businesses that are starting out, but once it is, they must apply it without error. If you're a business in the United Kingdom (UK) and your revenue is climbing toward the VAT registration threshold, you might be wondering what that means for you. Or maybe you're considering registering voluntarily but aren't sure if it's the right move.

Below, we'll explain what you need to know about the UK VAT threshold, what happens when you exceed it, and why some businesses register before they have to.

What's in this article?

• What is VAT?
  
• What is the current VAT registration threshold in the UK?
  
• What happens if a business exceeds the VAT threshold?
  
• Can businesses register for VAT voluntarily?
  

What is VAT?

VAT is a consumption tax applied to most goods and services in the UK. Customers pay the tax, and businesses must collect and remit it. In the UK, VAT took effect in 1973, and it has generated substantial government revenue. Unlike income or corporate tax, which targets earnings, VAT is based on spending. The more an individual or business buys, the more VAT they pay.

Here's how it works:

• VAT applies at every stage of production where value is created, including manufacturing, wholesale, and retail.

• Businesses registered for VAT must charge it on their sales and submit it to His Majesty’s Revenue & Customs (HMRC).

• VAT-registered businesses can reclaim VAT on eligible expenses such as supplies, equipment, and services, so they don’t pay tax on their own costs.

If your business is registered, you have certain responsibilities:

• Charging VAT: You must apply VAT to taxable sales and issue VAT invoices to customers.

• Tracking VAT on expenses: You must keep detailed records of the VAT you pay on business costs if you want to reclaim it.

• Filing VAT returns: You must submit regular reports that reconcile the VAT collected from sales with the VAT paid on expenses.

What is the current VAT registration threshold in the UK?

The VAT threshold is the point at which a UK business must register for VAT. As of April 2024, the threshold is £90,000 in taxable turnover during any rolling 12-month period. A business must monitor its turnover every month to check whether it's approaching the threshold.

If your taxable turnover has exceeded £90,000 in the past 12 months or if you expect it to in the next 30 days, you are legally required to register for VAT. If your business is approaching the threshold – especially if your turnover is £70,000–£90,000 – you should track your revenue carefully and prepare for VAT registration in advance. VAT registration isn't optional once you exceed the limit, and failing to register on time can lead to penalties.

What is taxable turnover?

Taxable turnover includes all sales of goods and services that aren't exempt from VAT. Here's how VAT applies to different types of sales:

• Most everyday goods and services are taxed at the standard rate of 20%.

• Certain items such as home energy and children's car seats are taxed at a reduced rate of 5%.

• Some items, such as most food, books, and children’s clothing, are zero-rated, which means VAT applies at a 0% rate.

• Goods and services such as financial services and education are exempt from VAT. You don't charge any VAT, and these sales don't contribute to your taxable revenue.

What happens if a business exceeds the VAT threshold?

Once you cross the VAT threshold, you are legally required to register for VAT and charge it. Here's how to do so:

Register for VAT on time

Establish a system to monitor your rolling 12-month turnover to avoid unexpected threshold breaches and prepare accordingly:

• If your turnover exceeded £90,000, you must register within 30 days of the end of the month when you crossed the threshold.

• If you expect to exceed £90,000 within the next 30 days, you must register before the end of that period.

• If your revenue is nearing £90,000, update your invoicing, pricing, and accounting systems to handle VAT.

If you miss the registration deadline, you will still owe VAT from the date you should have registered, even if you didn't charge customers for it. Late registration penalties might also apply, depending on how much time has passed.

You can register online via GOV.UK. Once approved, HMRC will issue:

• Your VAT registration number

• Your effective date of VAT registration, which is the date from which you must start charging VAT

If your taxable turnover exceeds the threshold but later drops back below £88,000, you can ask HMRC to cancel your registration.

Start charging VAT on sales

From your effective registration date, you must add VAT to all applicable sales at the correct VAT rate. Your invoices must include your VAT number and clearly show the VAT amount. Your business is now collecting VAT on behalf of HMRC, so accurate record-keeping is necessary. Many businesses update their billing software or use automated payment systems such as Stripe to calculate and apply VAT correctly.

File VAT returns and pay HMRC

VAT returns are typically due every quarter and must be filed digitally under Making Tax Digital rules. Each return outlines the VAT you charged customers, the VAT you paid on business expenses, and the difference. The latter determines whether you owe HMRC or are eligible for a refund.

Can businesses register for VAT voluntarily?

Yes. You don’t need to wait until your turnover is £90,000 to register for VAT. Many businesses choose to do so voluntarily, even when their revenue is below the threshold. Voluntary registration makes sense if you want to reclaim VAT on expenses, work with VAT-registered clients, or prepare for growth. But if your customers are sensitive to price changes or if you want to minimise administrative tasks, staying below the threshold might be the better option.

Here are the benefits and drawbacks of voluntary VAT registration:

Benefits of voluntary VAT registration

The biggest benefit of voluntary VAT registration is the ability to reclaim the VAT you pay on purchases such as supplies, equipment, and services. This can matter especially if the following applies to your business:

• Your business has substantial up-front costs that include VAT.

• You sell to VAT-registered businesses that can reclaim the VAT you charge them. Unlike with sales to individual customers, raising prices to include VAT for these businesses won't affect how much they end up paying.

• Your business sells zero-rated goods (e.g. most food and books), but you still pay VAT on expenses. If you register for VAT in this scenario, HMRC will typically owe you a VAT refund each quarter.

A VAT registration number can also make your business look more established. Some clients (particularly larger businesses) prefer to work with VAT-registered suppliers. Even if your turnover is below £90,000, registration signals that your business is growing and positioned for scale. If you are expanding, it makes sense to register for VAT as you near the threshold. Registering early lets you implement VAT-compliant systems in advance and avoid a rushed transition later.

Drawbacks of voluntary VAT registration

VAT registration comes with additional compliance responsibilities, whether you register voluntarily or out of necessity. These include filing VAT returns, keeping VAT records, and accurately calculating VAT on all sales and expenses. Managing VAT can make your accounting more complicated and might require software tools or professional help to stay compliant.

If your customers are mainly individuals or businesses that are not registered for VAT, adding 20% VAT can potentially make you less competitive by forcing you to raise your prices. Some small businesses stay below the VAT threshold to keep their prices lower than those of VAT-registered competitors. If most of your customers can't reclaim VAT, you’ll need to decide whether it's feasible to absorb some of the tax cost or whether they can pay the higher prices.