Knowing whether you need to register for VAT, and how it all works, can be daunting. One of the first things to trip up lots of people is that registering for VAT is based on your business’s turnover, not on what type of business it is.
So, whether you’re an individual sole trader, a limited company, something else, or just starting out and haven’t decided yet, we’ve put together a quick guide to help.
First off, what is VAT?
VAT is a tax known as a ‘consumption tax’, which means it’s applied at the point when goods, services, or other taxable supplies are purchased.
Businesses which become VAT registered effectively act as a tax collector on behalf of HMRC. They charge VAT on the taxable sales they make to collect it from their customers, and then pay it on to HMRC by completing a VAT return. For this reason, it’s sometimes also known as an ‘indirect tax’.
Who must register for VAT?
As soon as your overall takings (known as turnover) of VAT taxable sales reach £90,000 in a continuous 12-month period, or you expect them to within the next 30 days, you must register for VAT.
Is the VAT threshold different for sole traders and limited companies?
No. That’s the short answer. You’re welcome.
Regardless of whether you’re a sole trader operating alone, or running a large company with multiple sites, the registration threshold is the same. As soon as your turnover from the last 12 months reaches £90,000, or if you expect to reach it in the next 30 days, you must register for VAT.
The key takeaway message here is that even when you’re not VAT registered, it’s essential to keep a close eye on your turnover. You need to inform HMRC as soon as the magic number looms.
Can I register for VAT voluntarily?
Yes, you can decide to sign up for VAT voluntarily even if your business turnover isn’t at the £90,000 threshold.
A big advantage of registering for VAT is that the business is then able to reclaim VAT on any purchases it makes. So, is it worth every business becoming VAT registered?
Well, add up the VAT you paid on purchases for the business over a period of time. Then imagine you were registered for VAT during the same time period, and work out the total amount of VAT you would have charged on your sales.
- More VAT charged on sales than paid on purchases: Pay the difference to HMRC
- More VAT paid on purchases than collected from sales: Claim the difference back from HMRC
If your business regularly pays more VAT on its purchases than it collects through sales (like if the goods and products you sell are exempt from VAT), then registering voluntarily can be very tax efficient because you’ll be able to claim back the VAT you pay!
Voluntary VAT registration is also useful if you want to make your business look larger or more stable, because it suggests you’ve already reached the registration threshold. In some cases, such as bidding for contracts, you might even find it’s a requirement.
How do I calculate my taxable turnover?
Calculating your taxable turnover is actually fairly simple, as long as you keep good financial records. Forgetting VAT for a moment, this is well worth doing anyway. It’s always a good idea to keep tabs on the financial health of your business!
Anyway, back to VAT.
Calculating turnover excludes sales which are ‘outside the scope of VAT’, because VAT isn’t chargeable on them. Common examples include financial services, sporting activities, or education. Despite the amount of VAT charged being zero, being exempt from VAT is not the same as being zero-rated!
If you use good accounting software (which we know rather a lot about) then it will calculate your taxable turnover for you in real time.
What should be included in taxable turnover?
HMRC are quite clear about what you should include when working out the taxable turnover of a business, such as goods and services which you sell, loan, or hire to customers. They publish a full list in their guide to calculating VAT turnover.
Calculating VAT taxable turnover for sole traders
A sole trader with multiple sole trader businesses must use the total taxable turnover of all their businesses, because there’s no legal separation between them.
How do I register for VAT?
There are a few ways you can register for VAT, although you’ll need to decide which VAT scheme you’re applying to before you get that far.
- The majority of businesses register online through the HMRC website using a Government Gateway login
- You can also ask an accountant to register the business for you, submit your returns, and deal with HMRC on your behalf. HMRC hold music is definitely not for the faint-hearted, so it might be worth it just to avoid that.
- It’s also possible to register for VAT by posting a completed VAT1 form, although this won’t get you off the hook when it comes to the requirement for keeping MTD-compliant digital records, and submitting returns.
What happens after I apply for VAT registration?
Once you complete the VAT registration process, HMRC will issue you with a VAT number, and confirm the due date of your first VAT return. You’ll need to include your VAT number on all your invoices, and charge customers the correct rate of VAT on each taxable sale.
What are the current VAT rates?
There are currently three rates of VAT used in the UK:
| VAT Type | VAT Rate | What it applies to |
| Standard rate | 20% | Most goods and services |
| Reduced rate | 5% | Some goods and services, such as home energy and children’s car seats |
| Zero rate | 0% | Zero-rated goods and services, e.g., most food and children’s clothes |
Can I apply for a VAT registration exception?
Yes, potentially. Even if your turnover exceeds £90,000, you can apply for an exemption to VAT registration if you strongly believe it will only be temporary. This could be because you’ve had a one-off bumper year, but you don’t expect it to continue, for example. If your application is successful, you won’t need to register for VAT.
To apply for exemption, you need to explain your circumstances in writing to HMRC and provide documentary evidence to back up your case. As part of this, you must give good reasons behind your request. For instance, you should:
- Be able to show why crossing the VAT threshold is a one-off event for your business; and
- Explain why there is no reason to believe the threshold will be crossed in the foreseeable future
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