The VAT threshold is the maximum amount of VAT-taxable turnover your business can earn in any rolling 12-month period before you are legally required to register for VAT. As of 1st April 2024, the threshold is £90,000. HMRC has confirmed this figure will remain unchanged until at least 31st March 2026.
If your taxable turnover exceeds £90,000 within any 12-month period, or you expect to exceed that amount in the next 30 days alone, you must register for VAT with HMRC. This rule applies to sole traders, limited companies, partnerships and freelancers.
What is VAT (Value Added Tax)?
Is the VAT Threshold Based on Turnover or Profit?
One of the most common misunderstandings is whether VAT is based on turnover or profit. HMRC calculates the VAT threshold based on turnover not profit. Turnover is the total value of all taxable sales your business makes, excluding VAT itself.
Included in this total are:
- Standard-rated goods or services (20%)
- Reduced-rate goods or services (5%)
- Zero-rated items (0%)
Not included in this total are:
- VAT-exempt sales (such as healthcare or education)
- Non-business income or funding that falls outside the scope of VAT
- Most grants and donations that are not in return for goods or services
How to Monitor Your VAT Turnover Accurately
Because VAT registration goes by a rolling 12-month period, not a tax or calendar year, you must monitor your turnover every month. This helps you avoid accidentally passing the threshold without realising.
To stay on track:
- Use accounting software, such are QuickBooks or Xero
- Schedule monthly reviews of your total VAT-able sales
- Set calendar alerts when you reach £67,500 (75%) and £81,000 (90%) of the threshold
- Keep a manual spreadsheet if you do not use software
- Document any one-off sales or seasonal spikes to understand income patterns
Failing to monitor your turnover could lead to fines and backdated VAT payments.
What Happens When You Cross the VAT Threshold
You must notify HMRC and register within 30 days of the end of the month in which your VAT-taxable turnover exceeds £90,000. Once registered:
- You must charge VAT on all taxable goods and services
- You can reclaim VAT on eligible business expenses
- You must keep digital records for six years
- You must submit quarterly VAT returns using MTD-compliant software
Usually, your registration date starts from the first day of the second month after crossing the threshold, unless you expect to go over within 30 days. Then, you must immediately register.
Can You Avoid VAT Registration Temporarily?
If your turnover only crosses the threshold due to a one-off event, you may apply for a VAT registration exception. To apply, write to HMRC explaining why the surge was temporary and provide evidence, such as contracts or forecasts.
If approved, you will not need to register. If rejected, you must register for VAT.
Remember: This is a one-time exception, not a permanent exclusion.
What If Turnover Drops Below the VAT Threshold?
You can apply to deregister from VAT if your taxable turnover drops below the deregistration threshold of £88,000. Deregistering allows you to stop charging VAT and submit a final VAT return.
However, deregistration is not automatic. You must apply and receive approval from HMRC. Even after deregistering, you are required to maintain VAT records for auditing purposes.
Voluntary VAT Registration Without Going Over the Threshold
Some businesses register for VAT voluntarily, even if they have not yet reached the threshold.
Why?
- To reclaim VAT on start-up costs and operational expenses
- To appear more credible and professional
- To prepare for anticipated growth
However, if customers are mainly individual or non-VAT-registered businesses, charging VAT might make your pricing less competitive.
VAT Accounting Schemes
Once you are VAT-registered, you must choose how to manage your VAT reporting and payments. The scheme you select impact your cash flow and administrative workload.
Flat Rate Scheme (FRS) – Read more
- For businesses with turnover under £150,000 (excluding VAT)
- Pay a fixed percentage of turnover to HMRC
- Usually cannot reclaim VAT on purchases (except Capital Assets over £2,000)
- Suits service-based businesses with low costs
Cash Accounting Scheme – Read more
- For turnover up to £1.35 million
- Pay VAT only when customers pay you
- Reclaim VAT when you pay suppliers
- Helps smooth out cash flow, particularly with late-paying clients
Annual Accounting Scheme
- Also for turnover up to £1.35 million
- Submit one VAT return annually
- Make fixed advance payments throughout the year
- Reduces paperwork but requires accurate cash flow forecasting
Compliance with Making Tax Digital (MTD)
All VAT-registered businesses must follow the Making Tax Digital rules. This means:
- Using HMRC-approved software
- Keeping all VAT records digitally
- Submitting VAT returns through the software
Manual submissions or spreadsheets alone are not acceptable. Even if the figures are correct, failing to follow MTD rules may still result in penalties.
Read more: Making Tax Digital for VAT
What Happens If You Register Late?
Late VAT registration can be costly. HMRC calculate what VAT you should have charged from the date registration was required, even if you didn’t charge it to customers.
You will then owe:
- The uncharged VAT
- A penalty based on how late you registered
- Daily accruing interest on the unpaid VAT
Penalty levels vary depending on the amount of months late:
- 5% if registration is up to 9 months late
- 10% if 9 to 18 months late
- 15% if more than 18 months late
Interest is based on the Bank of England Base Rate plus 2.5% and it accumulates from the due date.
VAT Return Filing Deadlines
You will generally submit VAT returns quarterly. Each quarter ends after three months, and the return is due one calendar months and seven days later. These quarterly deadlines are as follows:
- 31st March Quarter = Due 7th May
- 30th June Quarter = Due 7th August
- 30th September Quarter = Due 7th November
- 31st December Quarter = Due 7th February
Late submissions result in:
- A points-based penalty system (£200 after four missed returns)
- Interest charges on overdue payments
What Do I Need to Give My Accountant for My VAT Return?
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