VAT is one of those things that can suddenly become relevant as your business grows.
You might be getting close to the threshold and wondering when you actually need to register. You might be considering registering voluntarily. Or you might already be VAT registered and wondering whether you still need to be.
The key thing is to keep an eye on your turnover and understand what changes once VAT applies to your business. Here’s a practical step-by-step guide.
1. Check whether you need to register for VAT
You must register for VAT if your taxable turnover goes over £90,000 in a rolling 12-month period.
The words “rolling 12 months” are important.
It isn’t based on the calendar year or your financial year. At the end of each month, you need to look back at the previous 12 months and check your total taxable turnover.
You also need to register if you expect your taxable turnover to go over £90,000 in the next 30 days alone.
For example, if your turnover has steadily increased and reaches £92,000 across the previous 12 months, you may have reached the point where registration is required.
Or perhaps you win a large contract and know that your taxable turnover will exceed £90,000 in the next 30 days. That can also trigger registration.
The important thing is to monitor turnover regularly rather than waiting until year end.
2. Work out what counts towards your taxable turnover
Your taxable turnover is the total value of the goods and services you sell that are not VAT exempt or outside the scope of VAT.
That can include sales that are:
standard-rated
reduced-rated
zero-rated
It can also include some other supplies, such as goods used privately or certain reverse-charge transactions.
For example:
A consultant providing standard-rated services will usually include those sales in taxable turnover.
A retailer selling a mixture of standard-rated and zero-rated goods may need to include both.
A business making exempt supplies may be in a different position.
If you’re getting close to the threshold, it’s worth checking what should and shouldn’t be included rather than estimating from the balance in your bank account.
3. Decide whether voluntary VAT registration makes sense
You can choose to register for VAT even if your taxable turnover is below £90,000. This is known as voluntary registration.
For some businesses, that can make sense.
For example, if most of your customers are VAT-registered businesses, adding VAT to your invoices may have less impact because they may be able to reclaim it.
You may also be able to reclaim VAT on eligible business purchases and expenses once you’re registered.
For businesses selling mainly to consumers, it can be a different conversation because customers cannot usually reclaim the VAT you charge. That can affect your pricing.
So voluntary registration is not just a tax decision. It can also affect pricing, cashflow and how competitive your prices look.
4. Register for VAT
Most businesses register online through HMRC. You’ll need information such as your:
business details
bank account details
Unique Taxpayer Reference, if you have one
annual turnover
estimated taxable turnover for the next 12 months
Depending on your circumstances, HMRC may also ask for information from your Self Assessment return, payslips or P60.
If your taxable turnover has gone over £90,000 across the previous 12 months, you normally need to register within 30 days of the end of the month in which you exceeded the threshold.
If you expect to exceed £90,000 in the next 30 days, the effective registration date can be the date you first realised you would exceed it.
That is why it is worth speaking to your accountant as soon as you think VAT registration may be approaching.
5. Set up your VAT properly
Once you’re VAT registered, there are a few practical changes to make.
You’ll need to start charging the correct amount of VAT on taxable sales from your effective registration date, and make sure your invoices contain the right information and that your bookkeeping software is set up correctly.
You may be able to reclaim VAT on eligible business purchases, so keeping accurate invoices and records becomes particularly important.
This is also a good time to review your pricing.
For example, a consultant charging £1,000 to another VAT-registered business may be able to add VAT without significantly affecting the customer.
A salon, café or other consumer-facing business may need to think more carefully about whether to increase the final price, absorb some of the VAT or review its wider pricing structure.
Getting this set up properly at the start can make the ongoing VAT process much easier.
6. Submit VAT returns and manage the payments
Once registered, VAT becomes part of your regular accounting routine.
Most businesses submit a VAT Return every three months. Your return and payment are usually due one calendar month and seven days after the end of your VAT accounting period.
So, for example, if your VAT quarter ends on 31 March, the return and payment would usually be due by 7 May.
Your exact VAT periods and deadlines will be shown in your HMRC VAT account. You’ll need to keep digital VAT records and submit your returns using compatible software.
Your VAT return works out how much VAT you have charged customers and how much eligible VAT you can reclaim on business purchases.
The difference is generally what you pay to HMRC, or what HMRC may owe you.
It is also worth remembering that VAT you collect from customers is not simply extra income for the business. Keeping track of your VAT position throughout the quarter can make the payment easier to plan for.
If you miss a VAT return deadline, HMRC uses a points-based system. Quarterly filers normally receive a penalty point for each late return, and once you reach the penalty threshold, a financial penalty can apply.
If the VAT payment itself is late, HMRC can also charge late payment interest from the first day it is overdue, with further penalties possible if the amount remains unpaid.
If you do miss a deadline, deal with it as soon as you realise. Submit the return, make the payment and speak to your accountant if you are unsure what has been added or what to do next.
Keeping your bookkeeping up to date throughout the quarter makes all of this much easier, because your VAT return is only as accurate as the information going into it.
7. Know when and how to deregister from VAT
Being VAT registered does not necessarily mean you’ll stay registered forever.
You must cancel your VAT registration if you stop being eligible to be registered, for example if you stop trading or stop making taxable supplies. HMRC says this should normally be done within 30 days.
You can also ask HMRC to cancel your registration voluntarily if your taxable turnover is expected to fall below the current deregistration threshold of £88,000.
For example, you might:
lose a large contract
reduce your working hours
change the type of work you do
deliberately reduce the size of the business
Before deregistering, it is worth looking at the wider impact.
HMRC may require VAT to be accounted for on certain stock or business assets you still own if VAT was reclaimed on them and the VAT due on those assets is more than £1,000. You’ll also need to submit a final VAT return and keep your VAT records for six years.
So, as with registration, it is worth checking the position before making the change.
VAT registration is about more than hitting a number
The £90,000 threshold is the point many businesses focus on, but VAT registration can affect much more than compliance.
It can change your pricing, cashflow, invoicing, bookkeeping and the way customers see your prices.
Equally, voluntary registration can make sense for some businesses before they ever reach the threshold, and if your business changes later, deregistration may become an option too.
If you’re approaching the VAT threshold, thinking about registering voluntarily or wondering whether you still need to be registered, speak to us.
At AFor Accounting, we can look at your figures, your customers and how your business works, and help you understand what VAT registration would actually mean for you.