The VAT (Value Added Tax) threshold in the UK determines when businesses need to register for VAT with HMRC. This means that if your taxable turnover surpasses a set limit, you must collect VAT from your customers and submit it to the government. Understanding the VAT threshold is vital for businesses of all sizes to ensure legal compliance and manage your cash flow effectively.
How much is the current VAT threshold?
As of 2024, the VAT threshold in the UK is £90,000. This figure represents the total taxable turnover a business can earn within a 12-month rolling period before being legally required to register for VAT.
💡Editor's insight
"I see a lot of sources claiming the threshold is £85,000 - this is incorrect. The Gov.UK site clearly states that 'Businesses have to register for VAT if their VAT taxable turnover is more than £90,000' - as of 2024"
What counts as taxable turnover?
Taxable turnover includes the total value of all goods and services a business sells that are not exempt from VAT. It includes:
Standard-rated items (20% VAT)
Reduced-rated items (5% VAT)
Zero-rated items (0% VAT, though still taxable for threshold purposes)
Non-taxable income, such as financial services and rental income from residential properties, does not count towards the threshold.
What happens once you meet the threshold?
Once your taxable turnover exceeds the VAT threshold of £90,000, you must register for VAT with HMRC within 30 days. This process triggers certain obligations and changes for your business operations.
Obligations after registration
Charging VAT: You’ll need to add VAT to the prices of your taxable goods or services.
VAT returns: You'll need to submit regular VAT returns (typically quarterly) to HMRC.
VAT payments: You'll ned to pay the VAT you collect from customers to HMRC, minus any VAT you reclaim on business purchases.
What are the consequences?
Failing to register for VAT on time can have serious consequences, including:
Penalties: HMRC may impose financial penalties for late registration, calculated as a percentage of the VAT owed.
Backdated VAT: You’ll be required to pay VAT on sales made during the period you should have been registered, even if you didn’t charge customers VAT.
Interest charges: Interest may be added to the VAT owed for late payment.
How has the VAT threshold changed over the years?
The VAT threshold is currently £90,000. Before that, the threshold was fixed at £85,000 - the increase came as part of the Spring Budget 2024. And prior to 2017, it was subject to periodic increases, often aligning with inflation:
2010: £70,000
2014: £81,000
2017: £85,000
2024: £90,000
Accounting for VAT thresholds
Monitoring your taxable turnover is crucial for determining when you need to register for VAT. Using accounting software or hiring a professional accountant can make this process more manageable.
Tips for tracking your turnover
Maintain up-to-date records: Track your sales monthly to stay aware of your taxable turnover.
Use rolling calculations: Remember that the threshold applies to any 12-month period, not just your financial year.
Plan for growth: If your business is nearing the threshold, consider the impact VAT registration will have on your pricing and cash flow.
Some businesses may intentionally limit their turnover to remain below the VAT threshold. While legal, this strategy - known as 'VAT threshold avoidance' - can restrict growth opportunities.
Steps to register for VAT
When your turnover exceeds the VAT threshold, registering for VAT with HMRC is mandatory. Here’s how to go about it:
Apply online: Register via the Government Gateway or through an accountant.
Receive your VAT registration number: HMRC will provide this after processing your application.
Update your invoicing: Add VAT to your invoices and include your VAT number.
Adjust your pricing: Consider how charging VAT will affect your customers and profit margins.
Set up VAT accounting: Ensure your financial records comply with VAT requirements, including keeping receipts and invoices for reclaiming input VAT.
Do you pay VAT on the first £90,000?
No, you do not pay VAT on the first £90,000 of taxable turnover. The VAT threshold is essentially a trigger point. Once your turnover surpasses £90,000, VAT applies only to sales made after you’re registered.
For example, if your business earns £95,000 in taxable turnover within a 12-month period:
You would charge VAT only on the portion exceeding £90,000 if you register immediately after crossing the threshold.
However, if you don't register promptly, it may lead to HMRC requiring backdated VAT payments.
FAQs
What is the threshold for VAT registration in the UK?
The VAT registration threshold in the UK is £90,000. Businesses with a taxable turnover exceeding this amount in any 12-month rolling period must register for VAT.
What happens if my turnover temporarily exceeds the threshold?
If your turnover exceeds £90,000 but is expected to fall below this level within the next 12 months, you may apply for an exemption. However, you must provide evidence to HMRC to support your claim.
Can I register for VAT voluntarily?
Yes, businesses with turnover below the threshold can register for VAT voluntarily. This can be beneficial if you buy from VAT-registered suppliers, as you can reclaim the VAT paid on your purchases.
Are there any exemptions from VAT registration?
Certain businesses dealing only in VAT-exempt goods and services (e.g., insurance, education, and financial services) are exempt from VAT registration.
How often do I need to submit VAT returns?
Most businesses file VAT returns quarterly, though annual accounting and monthly returns are also options.
How can I find a business' VAT number?
HMRC provides a free tool to verify UK VAT numbers. You can learn more in our full guide to checking a VAT number.
Does incorporating reset the VAT threshold?
If a sole trader becomes a limited company, it can reset the turnover for VAT registration to zero. If you're considering incorporating your business, our memorandum of association solicitors can help.
Final thoughts
Understanding the VAT threshold and its implications is critical for small businesses in the UK. Whether you’re approaching the limit or planning for future growth, being proactive about VAT registration helps ensure compliance and avoids unnecessary penalties.
Staying informed about your obligations, keeping accurate records, and seeking professional advice when needed can make the process smoother. While VAT registration introduces additional responsibilities, it can also signal your business’s growth and success.
If you have a business legal concern, we want to hear about it. Get your free, fixed-fee quote today and see how our small business law solicitors can help.
References
VAT form Gov.UK
How VAT works from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant. Bear in mind that tax rules can change and will differ based on your circumstances.