When do I have to register for VAT?

Registration becomes compulsory when taxable turnover exceeds £90,000. Two separate tests trigger it, and most businesses only think about the first.

The two triggers

• The backward-looking test. At the end of every month, add up taxable turnover for the preceding 12 months. If it exceeds £90,000, you must notify HMRC within 30 days, and registration takes effect from the first day of the second month after you went over.
• The forward-looking test. If at any point you have reasonable grounds to expect turnover to exceed £90,000 in the next 30 days alone — a single large contract will do it — you must register immediately, with effect from the date that expectation arose.

Taxable turnover includes zero-rated supplies such as most food, books and children's clothing, even though no VAT is charged on them. It excludes exempt supplies like insurance, financial services and most residential lettings — and a business making only exempt supplies cannot register at all. Failing to register on time and charging VAT before you are registered both attract penalties.

Registering voluntarily, and what follows

You can register below the threshold. It usually pays if your customers are themselves VAT-registered — they reclaim what you charge, so your price does not really rise — and it lets you recover VAT on purchases. Selling mainly to consumers is the opposite case: registration effectively makes you 20% more expensive than an unregistered competitor.

Once registered you must charge VAT on taxable supplies, file returns (usually quarterly, due one calendar month and seven days after the period end), and keep digital records and file through Making Tax Digital-compatible software. Typing figures into the HMRC portal by hand is not permitted.

Two schemes are worth checking. The Flat Rate Scheme is open to businesses with taxable turnover under £150,000 and replaces input/output calculations with a fixed percentage of gross turnover — but watch the limited cost trader rule, which forces a 16.5% rate where goods purchases are under 2% of turnover or below £1,000. Cash accounting helps if customers pay slowly.

You can reclaim VAT on goods bought up to four years before registration if you still hold them, and on services bought in the previous six months, through your first return. And if turnover later falls below the £88,000 deregistration threshold you can apply to come out — though you may have to account for VAT on assets still held.