UK VAT Registration: When You Must Register and What It Means

VAT registration is one of those milestones that catches small business owners off guard. One day you're happily invoicing without it, the next you're legally required to charge it. Here's what you need to know for 2025/26.

The VAT Registration Threshold

You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. You must also register if you expect to go over £90,000 in the next 30 days alone. The threshold was raised from £85,000 in April 2024.

Once registered, you charge VAT on your goods and services, submit quarterly VAT returns through Making Tax Digital, and can reclaim VAT on your business purchases.

The Three UK VAT Rates

Zero-rated items are still "VAT-taxable" — they just happen to be taxed at 0%. This is different from VAT-exempt supplies (like financial services and education), which fall outside the VAT system entirely.

Should You Register Voluntarily?

You can register for VAT even if your turnover is below £90,000. This makes sense if you sell primarily to VAT-registered businesses (they reclaim the VAT, so it doesn't affect your price to them) and you have significant business expenses with VAT on them (you can reclaim this). It can also make your business look more established and credible.

Voluntary registration doesn't make sense if most of your customers are consumers (the general public) who can't reclaim VAT — your prices effectively go up 20%, or your margins shrink by 20% if you absorb it.

The Flat Rate Scheme

If your VAT-taxable turnover is below £150,000 (excluding VAT), you may be eligible for the Flat Rate Scheme. Instead of tracking VAT on every purchase, you pay HMRC a fixed percentage of your gross turnover. The percentage varies by industry — IT consultants pay 14.5%, for example.

The scheme simplifies admin, but since April 2017, "limited cost traders" (those whose goods purchases are less than 2% of turnover or under £1,000 per year) must use a flat rate of 16.5%, which is rarely beneficial. Most service businesses now find the standard scheme better.

How VAT Affects Your Pricing

The VAT Threshold Cliff Edge

Many small businesses deliberately keep turnover below £90,000 to avoid VAT registration. This is legal but limiting. If you're a consultant charging £400/day to B2B clients, there's no reason to avoid registration — your clients reclaim the VAT anyway, and you benefit from reclaiming VAT on your own expenses.

The cliff edge mainly hurts consumer-facing businesses: a freelance photographer, a personal trainer, or a small retailer whose customers can't reclaim VAT. For these businesses, going from £89,000 to £91,000 in turnover can actually reduce your net income.

VAT Cash Accounting vs Standard Accounting

Under standard VAT accounting, you owe VAT to HMRC when you issue an invoice — even if the customer hasn't paid yet. This creates a cash flow problem for businesses with slow-paying clients: you're effectively lending the government money while you wait for payment.

Cash accounting solves this by aligning your VAT liability with actual payments received and made. You only pay VAT to HMRC when the customer pays you, and you only claim input VAT when you pay your suppliers. This is available to businesses with estimated VAT-taxable turnover of £1.35 million or less.

For service businesses like consultants and freelancers, cash accounting is usually the better option. It matches your cash flow more closely, and if a client doesn't pay, you don't owe VAT on the unpaid invoice. For product businesses with immediate payment (retail, e-commerce), it makes less difference.

Common VAT Mistakes to Avoid

Late registration. If your rolling 12-month turnover exceeds £90,000 and you don't register within 30 days, HMRC will backdate your registration and charge VAT on sales you've already made — from your own margin, since you can't retrospectively charge customers. This can be devastating for a business operating on tight margins.

Claiming VAT on everything. Not all expenses are eligible for VAT recovery. Business entertainment (client lunches, event hospitality) is blocked entirely. Cars used for private and business purposes are only partially recoverable. And if you're on the Flat Rate Scheme, you generally can't reclaim input VAT at all (with the exception of capital assets over £2,000).

Ignoring the reverse charge. If you buy services from overseas suppliers (software subscriptions, cloud hosting, international consultants), you may need to account for VAT under the reverse charge mechanism. This means you charge yourself VAT on the purchase and then reclaim it — a net-zero effect if you're fully taxable, but the failure to account for it is a compliance error that HMRC can penalise.

Mixing up inclusive and exclusive prices. Always be clear whether your prices include or exclude VAT. B2B customers expect prices ex-VAT. Consumer prices in the UK must be displayed including VAT. Confusion here leads to margin erosion or customer complaints.

De-Registration

You can apply to de-register for VAT if your taxable turnover drops below £88,000 (the de-registration threshold for 2025/26, which is always slightly below the registration threshold). This can be useful if your business scales down, you take a career break, or your revenue mix shifts toward exempt supplies.

When you de-register, you may need to account for VAT on any stock and capital assets you still hold on which you previously claimed input VAT. Your final VAT return covers the period up to your de-registration date. After de-registration, you must stop charging VAT to customers and update all invoices and price lists accordingly.

VAT and Digital Services

If you sell digital services (software, e-books, online courses, SaaS subscriptions) to consumers in other countries, the VAT rules are more complex. Under the UK's post-Brexit rules, digital services sold to UK consumers are subject to UK VAT at 20%. For sales to EU consumers, you may need to register for the EU's One Stop Shop (OSS) or charge VAT in the customer's country — unless you fall below the €10,000 EU-wide threshold.

Platforms like Stripe Tax and Paddle can handle multi-country VAT collection automatically, which is worth considering if international sales represent a meaningful portion of your revenue. For most UK-focused businesses this isn't a concern, but it's worth knowing about as you scale.

Making Tax Digital

All VAT-registered businesses must keep digital records and submit VAT returns through MTD-compatible software. This has been mandatory since April 2022 for all VAT-registered businesses, regardless of turnover. Popular software includes Xero, QuickBooks, FreeAgent, and Sage.

Key Dates to Remember

You must register within 30 days of the end of the month in which you exceeded the threshold. VAT returns are due quarterly, with payment due one month and seven days after the end of each quarter. Late registration, late returns, and late payments all attract penalties under HMRC's new points-based system.

Under the points-based penalty system (introduced January 2023), each late return adds a point. Once you reach the threshold (4 points for quarterly filers), you receive a £200 penalty for each subsequent late return. Points expire after a period of compliance — 12 months for quarterly filers. Late payment penalties are separate: 2% of the unpaid VAT if payment is 15 days late, rising to 4% at 30 days late, plus daily interest after that. Setting up a direct debit for VAT payments eliminates late payment risk.

Use our VAT calculator for quick add/remove VAT calculations, and our Day Rate calculator if you're a freelancer working out whether to quote plus VAT.