When does a growing business have to register for VAT
The threshold test runs on a rolling basis, so a good quarter can push you over it without anything changing at the year end. Here is how we read it with owners, and what we tell them to sort out before the registration date rather than after.
When does a growing business have to register for VAT is one of those questions that usually arrives too late. The owner rings in March because a customer asked for a VAT number, and the honest answer is that the business went over in November. Nothing in the business felt different that month. Turnover just kept climbing and nobody was watching the running total.
Our view is simple. The registration date is not something to find out about; it is something to forecast, the same way you forecast a hire or a van. If the books are current, you can see the threshold coming months out, decide what it does to your prices, and register on your own timetable.
Below is the test as HMRC applies it, the part that catches growing businesses out, and the three decisions that matter more than the paperwork.
The test watches any twelve months, not your year
The part owners get wrong is the period. The test is not your accounting year and it does not reset in April. At the end of every month, you add up taxable turnover for that month and the eleven before it. If that running figure goes past the registration threshold, which stands at £90,000 from 1 April 2024, you have 30 days from the end of that month to register. Your registration then takes effect from the first day of the month after that.
So a business that quietly did eight grand a month all year, then landed two strong months in the autumn, crosses the line in the autumn. The accounts filed the following summer will show it, which is nine months too late to do anything useful about it.
There is a second trigger that catches construction and agency owners in particular. If you sign something and expect to go past the threshold inside the next 30 days on its own, you register straight away, and the registration date is the day you knew, not the day the money arrived. One large contract can do it. The current rules are set out on GOV.UK.
Taxable turnover is wider than your sales invoices
The running total is not what hit the bank. It is taxable turnover, and it includes more than most owners assume.
- Zero-rated and reduced-rated sales count, even though no VAT is charged on them. New build work in construction is the classic one; the owner thinks it is outside the system and it is not.
- Goods you take out of the business for personal use count.
- Work paid for in kind, part exchanges, and gifts count.
- Services you buy where the reverse charge applies count towards your total.
- For construction, supplies under the domestic reverse charge count too, even though the VAT sits with the contractor.
What does not count is anything genuinely exempt, and sales of assets like a van you are replacing. That distinction has swung the answer more than once for us: a trades business that looked £15,000 over was actually under, because a van sale and a bit of exempt income had been thrown in the pot.
Getting this right is bookkeeping, nothing cleverer. If someone is reconciling the records every month and coding the odd items properly, the running total is a figure you can look at on any given Tuesday.
What registration does to your price list
The paperwork takes an hour. The pricing decision takes longer, and it is the one that costs money if you get it wrong.
If you sell to other VAT registered businesses, registration is close to neutral on price. They reclaim what you charge, so you add 20 per cent to the invoice and nothing much changes for them. For most construction subcontractors, agencies billing company clients, and garages doing fleet work, this is the position.
If you sell to the public, registration is a 20 per cent problem with three possible answers. You can put prices up and lose some customers. You can absorb it and watch your margin drop by a fifth on every sale. Or you can split the difference. Salons, garages doing retail work, and anyone invoicing households sit here, and the right answer depends on what your margin was to start with.
This is the conversation we would rather have six months before the threshold than six weeks after it. A salon client of ours went from one small shop to larger premises with four or five staff, and the VAT timing was part of the sum we ran before she signed the lease, alongside what the extra staff would really cost once PAYE and pension were in.
Registering early is sometimes the better call
You can register before you have to, and for some businesses it is the right move rather than a tidy-up job.
It makes sense when you are buying. A garage fitting out a second unit, a construction company buying plant, an agency kitting out a bigger office: the VAT on that spend comes back, and if your customers are VAT registered anyway, the cost of charging them is nothing. We have had owners register three months before a fit-out purely to recover the VAT on it.
It makes much less sense when you sell to the public and you are comfortably below the threshold. You would be handing HMRC a fifth of your revenue for no return, plus the quarterly returns and the digital record keeping that comes with them.
The middle case, where you are at £70,000 and climbing fast, usually resolves in favour of registering early. You will cross the line within the year, and going in on a date you chose beats backdating, reissuing invoices, and explaining to customers why last quarter’s price was wrong.
What happens if you have already missed it
If the running total went past the threshold some months ago and nothing was filed, the position is recoverable, and it is better dealt with now than found later. You owe the VAT on sales from the date you should have been registered, whether or not you charged it, and there may be a penalty based on how much is owed and how late the registration is.
Two things usually soften it. You can reclaim VAT on purchases from that date, including some stock and equipment bought beforehand, which brings the net figure down. And a registration that you come forward with is treated differently from one HMRC finds. We have taken on disclosure work of this kind rather than refer it out, and the owners who got in touch themselves had an easier time of it.
There is also an exception to ask for if you went over because of something that will not repeat, a one-off job for instance, and your turnover for the next twelve months will stay under the deregistration level. HMRC has to agree it, so the case needs to be made properly with figures behind it.