How VAT registration works
VAT (Value Added Tax) is a consumption tax charged at 20% on most goods and services in the UK. Once registered, you add VAT to your invoices, collect it from customers, and pay it to HMRC after deducting the VAT you have paid on business purchases. Registration is compulsory once your taxable turnover breaches the threshold, but voluntary registration is also available below the threshold if it suits your business.
The rolling 12-month rule
The £90,000 threshold is measured on a rolling 12-month basis, not a tax year or calendar year. You must check at the end of every month whether your turnover in the preceding 12 months has exceeded £90,000. The moment it does, you have 30 days to notify HMRC. Registration is effective from the end of the 30-day notification period, or earlier if you choose.
What counts towards the threshold
Only VAT taxable supplies count. This includes standard-rated (20%), reduced-rated (5%), and zero-rated sales. Exempt supplies such as insurance, financial services, and most residential property lettings do not count. If you have a mixture, only the taxable portion is measured against the threshold.
The Flat Rate Scheme
The Flat Rate Scheme (FRS) simplifies VAT accounting for small businesses with turnover under £150,000. Instead of calculating VAT on every purchase and sale, you pay a fixed percentage of your gross (VAT-inclusive) turnover to HMRC. The rate depends on your trade sector. In the first year of registration you get a 1% discount on your sector rate. The FRS can be profitable if your input VAT (purchases) is low relative to your sales.
Pricing impact
If your customers are VAT-registered businesses, adding VAT has no real cost to them, they reclaim it on their own return. If you sell to consumers or non-VAT-registered businesses, adding 20% VAT either increases their cost by 20% or reduces your margin if you absorb it. This is the most significant consideration for B2C businesses approaching the threshold.
| VAT rate | Applies to |
|---|---|
| Standard rate (20%) | Most goods and services |
| Reduced rate (5%) | Home energy, children's car seats, some renovation work |
| Zero rate (0%) | Most food, books, children's clothing, public transport |
| Exempt | Insurance, financial services, health, education, residential letting |
Late registration penalty: Failing to register on time triggers a penalty of between 5% and 15% of the VAT due from the date you should have registered. HMRC can also assess back-VAT on sales made when you should have been registered, which can be substantial for businesses that have been trading over the threshold for an extended period.
Frequently asked questions
Yes. Voluntary registration makes sense if you have significant input VAT to reclaim on business purchases, or if your customers are VAT-registered and expect VAT invoices. It also gives the appearance of an established business. The downside is the administrative burden of quarterly VAT returns and the need to add VAT to your prices if selling to non-VAT-registered customers.
You can apply to deregister for VAT if your taxable turnover falls below £88,000. This is deliberately set below the registration threshold to prevent businesses from constantly registering and deregistering around the £90,000 mark. Deregistration means you stop charging VAT on sales, which may make you more competitive with non-registered competitors, but you also lose the ability to reclaim VAT on purchases.
Per business entity. If you run multiple separate businesses as a sole trader, HMRC may aggregate their turnover if they are considered to be artificially separated. This anti-avoidance rule applies where businesses are closely connected and separation is not commercially driven. However, genuinely separate limited companies each have their own £90,000 threshold. HMRC takes disaggregation seriously and has challenged arrangements where businesses have split to stay below the threshold without commercial justification.
No. The FRS is most beneficial for service-based businesses with low input costs, for example, consultants or freelancers who buy little in the way of VAT-able goods. If your business has significant purchases on which you pay VAT, the standard scheme (where you deduct input VAT from output VAT) will generally result in a lower net VAT payment. HMRC introduced the "limited cost trader" rate of 16.5% for businesses that spend less than 2% of turnover (or less than £1,000 per year) on goods, which significantly reduces the FRS benefit for many service businesses.
Related calculators
Tax Toolkit UK provides free calculators for guidance purposes only. Results are estimates for 2026/27. Always consult a qualified accountant before making VAT registration decisions.