How to decide if you need to register for VAT

The Bottom Line Up Front

You must register for Value Added Tax (VAT) with HM Revenue & Customs (HMRC) if your business's VAT-taxable turnover was more than £90,000 in the last 12 months, or you expect it to go over that threshold in the next 30 days alone. This is not optional. However, even if your turnover is below this threshold, you can choose to register voluntarily. This guide will walk you through how to determine if you need to register and whether choosing to do so would be a smart move for your business.

What is VAT?

VAT is a tax applied to most goods and services sold by VAT-registered businesses in the UK. When you are registered, you must charge VAT on your sales to customers. The good news is that you can also reclaim the VAT you pay on goods and services you buy for your business. The standard rate of VAT is currently 20%.

Understanding the Mandatory Registration Threshold

The key figure to remember is £90,000. The crucial part is understanding how this is calculated. It is not based on your tax year or financial year, but on a rolling 12-month period.

This means you need to look at your total VAT-taxable turnover from the last 12 months at the end of every single month. If the total for that 12-month window exceeds £90,000, you have crossed the threshold.

Example of a rolling 12-month period:

At the end of October, you calculate your turnover from 1st November last year to 31st October this year. It's £88,000. You don't need to register.

At the end of November, you calculate your turnover from 1st December last year to 30th November this year. You had a great month, and the total is now £91,000. You have now crossed the threshold.

Once you cross the threshold, you have 30 days from the end of that month to register with HMRC.

What counts as 'VAT-taxable turnover'?

This is the total value of everything you sell that isn't exempt from VAT. This includes sales of standard-rated (20%) and zero-rated (0%) goods and services. Things like postage, delivery charges, and even items you hire out to customers all count towards this total.

Voluntary VAT Registration: Should You Do It?

If your turnover is below £90,000, you don't have to register. However, you can choose to. For some businesses, this is a very good idea; for others, it's not. The decision usually depends on two key factors: your customers and your costs.

Here’s a breakdown of the main advantages and disadvantages to help you decide:

Advantages of Voluntary Registration

Disadvantages of Voluntary Registration

• Reclaim VAT on costs: This is the biggest benefit. You can reclaim the VAT on your business purchases, from stock and equipment to software and accountant's fees. You can even reclaim VAT on some goods and services you bought up to 4 years before you registered.
• Appears more professional: Being VAT registered can make your business seem larger and more established, which can be particularly helpful if you primarily sell to other businesses (B2B).
• Avoids future price shocks: Registering early means you don't have to suddenly add 20% to your prices when you eventually cross the threshold, which could be off-putting for regular customers.

• Increased prices for some customers: If you sell to the public (B2C), your prices will be 20% higher than a non-registered competitor, as your customers cannot reclaim the VAT.
• Administrative burden: You must keep detailed VAT records and submit regular VAT returns to HMRC, usually every quarter. This is done digitally and can be time-consuming.
• Potential cash flow impact: You are effectively collecting tax for HMRC. You need to be disciplined about setting aside the VAT you collect so you can pay your VAT bill when it's due.

Making Your Decision

Think carefully about your business model:

• If you sell mainly to other VAT-registered businesses (B2B), voluntary registration is often a good idea. Your customers can reclaim the VAT, so your prices don't really change for them, and you get to reclaim VAT on all your own costs.
• If you sell mainly to the public (B2C), it's often better to wait until you reach the threshold. Registering voluntarily would force you to either increase your prices by 20% or absorb the cost, significantly reducing your profit margin.
• If you have very high startup costs or ongoing expenses that include a lot of VAT, registering voluntarily might be worthwhile just for the ability to reclaim that VAT, even if you sell to the public.

Deciding on VAT registration is a key financial step. If you're unsure, it's always a good idea to discuss your specific situation with an accountant.