Do you know how VAT registration affects your business?
Posted on 25th February 2025
The VAT registration threshold increased to £90,000 in April 2024. The government says the UK’s VAT registration threshold is higher than any EU member state. It’s also the highest threshold in the Organisation for Economic Cooperation and Development (OECD), alongside Switzerland.
You might have felt relief about this change if your business turnover was approaching the previous threshold of £85,000. However, it probably hasn’t taken long for your turnover to increase further. You might now need to think about the impact of VAT registration for your business.
VAT registration is based on turnover
You must register for VAT when the taxable turnover of your business reaches the threshold in any 12-month period. This is the total VAT-able value of goods and services you sell, lease, loan or exchange. It also includes sales subject to an overseas or domestic ‘reverse charge’ and building work for your use over £100,000.
What VAT registration means for your business
Once registered, you must charge VAT at up to 20% on sales. However, it doesn’t apply to exempt goods and services or those outside the scope of VAT.
Managing VAT isn’t straightforward. You must work out how much VAT customers should pay you and show the amount clearly on your invoices. You must also record how much VAT you pay. To know your VAT liability, you must take away the VAT paid from VAT charged. You must send accurate returns and payments on time to HMRC or face fines and penalties.
Benefits of VAT registration
Registration can have benefits, even if your business hasn’t yet reached the £90,000 turnover threshold.
If your suppliers charge VAT, you can offset this against the VAT your business charges.
Example:
If you buy £10,000 worth of VAT-able goods and services, you’ll pay £12,000 in total.
If you have sold £20,000 of goods and services, you must charge your customers £4,000 of VAT.
The amount of VAT you have paid reduces the amount you pay to HMRC by 50%, to £2,000.
Being VAT registered can make your business seem larger and more established. This can encourage other businesses to work with you.
Disadvantages of VAT registration
The biggest challenge is the administration involved in making regular VAT returns and payments. This isn’t always straightforward because there are different rates, and you must use the right ones. You must also meet the requirements of Making Tax Digital (MTD) for VAT.
|
VAT rate |
Amount |
Applies to |
|
Standard |
20% |
Most goods and services. |
|
Reduced |
5% |
Selected goods and services, such as children's car seats. |
|
Zero |
0% |
Selected goods and services, such as most food and children’s clothes. |
|
Exempt |
N/a |
Selected goods and services, such as financial and property transactions and postage stamps. |
Adding VAT makes your products or services more expensive which is significant if most of your customers aren’t VAT registered. You might lose sales or absorb some of the extra cost, which will reduce your profits.
If you only sell products or services exempt from VAT, you can’t register or reclaim VAT charged by suppliers.
However, if your business sells zero-rated products or services, you can still register for VAT. You can then reclaim any VAT charged by your suppliers, even though your customers don’t pay VAT.
If your business sells a mix of exempt, zero-rated and VAT-able goods and services it’s difficult to keep track. If your figures aren’t correct, you could pay more VAT than necessary or face problems with HMRC.
Registering for VAT
You must register within 30 days of the end of the month your turnover reaches the threshold. Your registration must come into effect by the first day of the second month following your turnover exceeding £90,000. If your turnover has only temporarily gone over the threshold you can apply for a registration ‘exception’.
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