10 min read
Since April 2024, the VAT registration threshold in the UK has gone up to £90,000, giving small businesses a little more breathing room before VAT rules kick in. While this is welcome news for many, it also brings up a common question: should you register for VAT now, or wait until you have to?
If your turnover is getting close to that limit, or you’re thinking about growing your business, now’s a great time to take a fresh look at your VAT situation.
In this blog, we’ll break down what VAT means for you, how the new threshold might affect your business, and whether choosing to register voluntarily could actually work in your favour.
What is VAT, and how does it affect your business?
Value Added Tax (VAT) is a tax you pay when you buy most goods and services in the UK. It’s included in the price you pay, and businesses collect this tax from customers for the government. This means:
- When your business sells goods or services, you charge VAT to your customers—this is known as output tax.
- When you buy goods or services for your business, you pay VAT to your suppliers—this is called input tax.
You then report the difference between the two to HM Revenue & Customs (HMRC). If you collected more VAT than you paid, you pay the balance to HMRC. And, if you paid more than you collected, you can reclaim the difference.
UK VAT rates at a glance
VAT affects more than just what you charge your customers—it shapes how you set prices, issue invoices, and keep your books in order.
In the UK, the rate you charge depends on what you’re selling:
- Standard rate (20%) – Most goods and services.
- Reduced rate (5%) – Things like home energy and some energy-saving products.
- Zero rate (0%) – Most food, children’s clothes, and books.
Choosing the right VAT rate is important as it helps you:
- Stay compliant – Follow the rules and avoid mistakes.
- Price accurately –Set the right prices with VAT included.
- Keep records clean – Keep your records organised and easy to manage.
Knowing your VAT rate helps your business run smoothly and stress-free.
When is VAT registration mandatory?
You are legally required to register for VAT if:
- Your taxable turnover exceeds £90,000 in any rolling 12-month period or
- You anticipate going over the threshold within the next 30 days.
- Taxable turnover includes goods and services subject to VAT at 0%, 5%, or 20%. It excludes VAT-exempt income such as specific health, education, and insurance services.
If you’re a non-UK business supplying goods or services in the UK, you must register regardless of turnover.
Who benefits from the new threshold?
The April 2024 increase in the VAT registration threshold from £85,000 to £90,000 gives certain businesses more breathing room before registration becomes mandatory.
- Low-margin businesses – Those operating close to the old threshold now have extra space to grow turnover without triggering VAT obligations, helping maintain profitability.
- Service-based businesses – With minimal overheads, these businesses may choose to stay unregistered to avoid the administrative load of VAT returns and record-keeping.
- Part-time entrepreneurs and side hustlers – Individuals with growing side incomes can continue trading without the immediate need for VAT registration, making it easier to focus on scaling gradually.
Still, sometimes it can be worth registering for VAT before you hit the threshold — for example, if you want to claim back VAT on big purchases or show VAT-registered clients that your business is established and professional.
Key pros and cons of staying below the VAT threshold
This change brings both advantages and drawbacks for small businesses. Some of them are mentioned below:
Benefits of Staying Below the Threshold
- Reduced compliance – If your business stays under the £90,000 VAT registration limit, you don’t have to deal with VAT paperwork. This means:
- No quarterly VAT returns to submit
- Less record-keeping to worry about
- More time saved from doing tax admin
- For many small businesses, this means you can spend more time running your business instead of dealing with tax forms.
- Competitive pricing – Without VAT to add to your prices, you can remain more competitive, particularly in price-sensitive markets. This is often an advantage when competing against larger VAT-registered companies that must charge an additional 20% (or applicable rate).
- Simplicity – Operating without VAT obligations means lower overheads, fewer accounting complexities, and less need for specialist tax software.
Potential Challenges
- No input VAT recovery – If you buy from VAT-registered suppliers, you won’t be able to reclaim VAT on purchases, potentially increasing your costs.
- Growth interruption – If turnover suddenly exceeds £90,000, you must register promptly. This can create an administrative rush and potential penalties if deadlines are missed.
- Perception issues – Some clients or suppliers may view non-VAT registered businesses as smaller or less established, which could affect credibility in certain industries.
While the higher threshold offers breathing space for smaller enterprises, it’s worth reviewing your business plans. Staying under the limit can simplify operations, but if growth is your goal, early VAT registration might make strategic sense.
Should you register voluntarily?
Voluntary registration is when your business registers for VAT even though its turnover is under the threshold. It might sound like extra work, but there are situations where it can offer big advantages.
Pros of voluntary VAT registration
- Reclaim input VAT: If you purchase a lot of goods or services for your business, voluntary registration lets you reclaim VAT on those expenses.
- Improved credibility: Some clients and suppliers view VAT registration as a sign of professionalism and scale.
- Helpful for B2B businesses: If you work with VAT-registered clients, they can reclaim the VAT you charge, making the added tax a neutral factor.
Cons of voluntary VAT registration
- Added admin: You’ll need to charge VAT, submit quarterly returns, and maintain digital records.
- Cash flow considerations: You’ll be responsible for paying VAT to HMRC even if clients delay their payments. This can affect your cash flow unless you opt for the cash accounting scheme.
- Impact on pricing: For businesses selling directly to consumers (B2C), VAT-inclusive prices may seem higher, affecting competitiveness.
What happens after VAT registration?
Once you’re registered, several responsibilities kick in:
1. Filing VAT returns
Most businesses file quarterly. You report:
- Output tax (VAT you charged)
- Input tax (VAT you paid)
- The amount owed or reclaimable from HMRC
2. Digital compliance
Under Making Tax Digital (MTD), VAT-registered businesses must:
- Use compatible software
- Maintain digital records of all transactions
- Submit VAT returns electronically
3. Record-keeping requirements
You must store:
- Sales invoices
- Purchase receipts
- Credit notes or adjustments
- A running summary of your
- VAT account
These records need to be stored securely for at least six years.
Are there simplified VAT schemes?
Depending on your business turnover and sector, you may be eligible for special VAT schemes that simplify administration and improve cash flow:
- Flat Rate Scheme – Pay an industry-based fixed percentage of your total sales. This can make VAT calculations quicker, though you might pay slightly more or less than under the standard method.
- Annual Accounting Scheme – File just one VAT return a year and make advance or interim payments, reducing the frequency of paperwork.
- Cash Accounting Scheme – Only pay VAT when you’ve actually received payment from your customers, which can be especially helpful if late payments affect your cash flow.
While these schemes can save time and smooth finances, they aren’t suitable for every business. An expert accountant can evaluate your situation and suggest the right option that works for your business.
How can accountants make VAT easier?
VAT rules can be complex, but a skilled accountant can simplify the process and save you time, stress, and potential penalties. Here’s how:
- Assess your VAT position – They review your business activities and turnover to determine if you need to register or if it’s beneficial to do so voluntarily.
- Manage registration with HMRC – Accountants handle all the paperwork and ensure your VAT registration is completed correctly and promptly.
- Prepare and submit VAT returns – They calculate your VAT accurately, apply the correct rates, and make sure submissions are sent on time to avoid fines.
- Implement MTD-compliant software – Under Making Tax Digital rules, VAT records must be kept digitally. Accountants set up the right software, ensure compliance, and train your team to use it effectively.
- Support business growth – They track your turnover to prevent accidental threshold breaches and advise on VAT planning to keep cash flow healthy.
- Deal with HMRC on your behalf – From responding to queries to handling VAT inspections, your accountant acts as your representative, ensuring you meet all obligations with minimal disruption to your business.
Conclusion
The raised VAT threshold gives many small businesses breathing room, but it doesn’t remove the need to plan ahead. Voluntary VAT registration isn’t for everyone, but in the right circumstances, it can boost your cash flow, credibility, and client confidence.
If you’re not sure what to do, we are one call away. A little advice from an accounting expert today can save you big headaches later and put your business in the best possible position for growth.
