VAT registration: the £90,000 threshold and what crossing it really means

VAT registration is compulsory once your taxable turnover exceeds £90,000. The detail of how that is measured, and what registration does to a business that sells to the public, is worth understanding before you get close to it.

It is a rolling test

The most common misunderstanding is that the threshold applies to your accounting year or the tax year. It does not. You must check your taxable turnover for any rolling twelve-month period. At the end of every month, look back over the previous twelve.

There is also a forward-looking test: if you expect to exceed £90,000 in the next thirty days alone, you must register immediately. This catches businesses that win a single large contract.

Deadlines

You must register within thirty days of the end of the month in which you crossed the threshold. Registration is then effective from the first day of the month after that.

Registering late is expensive. You become liable for the VAT you should have charged from the date you should have registered, whether or not you actually collected it from your customers. Going back to past customers to ask for another 20% is rarely a comfortable conversation, so in practice it comes out of your margin.

What it means for your prices

This is the part that matters commercially, and it depends entirely on who your customers are.

If you sell to VAT-registered businesses, they reclaim whatever you charge. Registration costs them nothing and lets you recover VAT on your own purchases. It is close to a straightforward win.

If you sell to the public, they cannot reclaim. You either raise prices by 20% and become more expensive than your unregistered competitors, or hold prices and lose a sixth of your revenue. For a business trading just over the threshold, this can mean earning less after registration than before.

Voluntary registration

You can register before you have to. It makes sense if your customers are businesses, if you have significant VAT on start-up costs to recover, or if being registered lends credibility with the clients you want. It rarely makes sense for a consumer-facing business below the threshold.

Schemes worth knowing about

• Cash accounting — available under £1.35m turnover. You account for VAT when money moves rather than when you invoice, so you never pay HMRC for an invoice a customer has not settled.
• Flat Rate Scheme — charge 20%, pay HMRC a lower fixed percentage of gross turnover, generally without reclaiming input VAT. Suits low-cost service businesses, though the 16.5% limited cost trader rate removes most of the benefit for many.
• Annual accounting — one return a year with instalments, which smooths admin but not tax.

Once registered

You must keep digital records and file under Making Tax Digital using compatible software. Returns are usually quarterly. Late filing accrues penalty points, with a £200 charge once you reach the threshold for your filing frequency.

If your turnover is heading towards £90,000, talk to us before you get there rather than after. The decisions about pricing and scheme choice are much easier to make with a few months’ notice.