Value Added Tax is one of those things that most small business owners know they need to deal with eventually, but many put off thinking about until the last possible moment. The rules are actually more straightforward than they appear, and in some cases, registering for VAT voluntarily — even before you have to — can save you money.
When You Must Register
You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. You also need to register if you expect your turnover to exceed £90,000 in the next 30 days alone. The key word here is "taxable turnover" — this means the total value of sales that are not VAT-exempt, not your profit.
Once you cross the threshold, you must register within 30 days. Failure to register on time can result in penalties, and HMRC may charge you the VAT you should have been collecting from the date you should have registered.
Voluntary Registration
If your turnover is below £90,000, you can still choose to register. This makes sense if you primarily sell to VAT-registered businesses (who can reclaim the VAT you charge), if you have significant VAT-able expenses (you can reclaim the VAT on purchases), or if being VAT-registered adds credibility to your business.
It does not make sense if you sell mainly to consumers (who cannot reclaim VAT) and your expenses are low, because registering would effectively increase your prices by 20%.
The Flat Rate Scheme
The Flat Rate Scheme simplifies VAT accounting. Instead of tracking VAT on every purchase and sale, you pay a fixed percentage of your gross turnover to HMRC. The percentage depends on your industry — for example, IT consultants pay 14.5%, while retailers pay 4%. In the first year of VAT registration, you get a further 1% discount.
The scheme works well for businesses with low expenses, as you keep the difference between what you charge customers (20% VAT) and what you pay to HMRC (your flat rate percentage). Use our VAT calculator with the flat rate scheme option to see how it compares for your business.
Key Compliance Dates
VAT returns are submitted quarterly, with payment due one month and seven days after the end of each quarter. Most businesses must now use Making Tax Digital compatible software to file returns. The penalties for late filing and payment were reformed in January 2023 and now operate on a points-based system.
Use our VAT registration threshold calculator to track your rolling 12-month turnover against the £90,000 threshold.
M. Samiuddin QUADRI is a chartered certified accountant at Gladstone & Co. Accountants, specialising in VAT compliance for small businesses.