If you're running a small business in the UK, the term "VAT threshold" is one you'll hear a lot. So, what exactly is it?
In simple terms, it's a turnover figure set by the government. Once your total sales climb past this magic number within any 12-month period, you're legally required to register for Value Added Tax (VAT). As of April 2024, that key figure is £90,000. Think of it as a financial checkpoint for your growing business, but remember—it’s based on your total sales, not your profit.
What Is the VAT Threshold and How Does It Work?
Imagine a line in the sand drawn by HMRC. The VAT threshold is designed to keep the smallest businesses—the sole traders and micro-companies just starting out—from getting tangled up in the complexities of VAT accounting. It's a helping hand, but as your business flourishes and your sales start creeping towards that line, you need to pay close attention.
The heart of the matter is your "VAT taxable turnover." This is a crucial concept to grasp. It's not the profit you make or the cash left after paying bills. It’s the total value of everything you sell that isn't specifically exempt from VAT.
This includes more than just your main sales. You need to count:
- Sales of goods and services, whether they're at the standard rate (20%), reduced rate (5%), or even zero-rated (0%).
- Any goods you’ve hired or loaned out to customers.
- The market value of business stock you’ve taken for personal use.
- Things you might not think of, like sales made through bartering, part-exchanges, or even certain business gifts.
A common trip-up for business owners is only checking their turnover at the end of their financial year. That’s a mistake. The VAT threshold works on a rolling 12-month basis. This means at the end of every single month, you need to look back over the last 12 and add up your total taxable turnover. It’s a constant monitoring process that helps you see what’s coming and avoid any nasty surprises from HMRC.
The Recent Increase to the Threshold
To keep pace with the economy, the government occasionally adjusts this figure. In a recent move, the UK government lifted the VAT registration threshold from £85,000—a level it had been at since 2017—to the current £90,000 per year.
This change was a big deal for small businesses. It’s estimated to keep around 28,000 micro-businesses from having to enter the VAT system, saving them a significant amount of administrative work. You can find the official details by reading the government’s statement on the VAT threshold increase on Gov.uk.
Current UK VAT Thresholds at a Glance
To make it easier, here's a quick rundown of the numbers you need to know. These are the current figures that dictate when you need to register for or can deregister from VAT.
| Threshold Type | Amount | What It Means for Your Business |
|---|---|---|
| Registration Threshold | £90,000 | If your 12-month rolling turnover exceeds this, you must register for VAT. |
| Deregistration Threshold | £88,000 | If your turnover falls below this, you can apply to cancel your VAT registration. |
You might wonder why the deregistration threshold is slightly lower.
The purpose of having a lower deregistration threshold is to prevent businesses whose turnover hovers around the £90,000 mark from constantly cycling in and out of the VAT system, which would create administrative chaos for both the business and HMRC.
This two-tiered system creates a buffer zone, ensuring that only businesses with a sustained drop in turnover can leave the system.
Staying Below vs. Crossing the Line
If your turnover is comfortably under £90,000, you don't have to do anything. You can continue operating outside the VAT system, which keeps your pricing straightforward and your bookkeeping simpler.
The moment you cross that £90,000 line in any rolling 12-month period, the game changes. You are then legally obligated to register for VAT with HMRC. From that point on, you must charge VAT on your sales, but the silver lining is you can also start reclaiming the VAT you pay on your own business purchases and expenses. Realising you’re about to cross that threshold is a critical strategic moment, and planning for it is key.
How to Calculate Your Taxable Turnover Correctly
Getting your turnover calculation wrong is probably one of the easiest, and most expensive, mistakes a small business can make. To keep on the right side of HMRC, you need to get comfortable with the rolling 12-month calculation. This isn't about looking at your financial year or your tax return period; it’s a living, breathing check on your sales that you should be doing constantly.
Think of it as your business's early warning system. At the end of every single month, you need to add up all your VAT-taxable sales from the previous 12 months. This dynamic view helps you see the small business VAT threshold approaching on the horizon, rather than having it suddenly appear in your rear-view mirror.
What to Include in Your Calculation
Your VAT taxable turnover is the total value of everything you sell that isn't specifically exempt from VAT. It's really important to get this right, because it's often more than just the headline sales figures you see in your bank account.
You must include the following:
- Sales of Goods and Services: This is the obvious one. It covers everything you sell at the standard (20%), reduced (5%), and even zero-rated (0%) VAT rates.
- Goods Hired or Loaned: If you rent out equipment or lend items to customers for a fee, that income counts.
- Business Assets for Personal Use: The value of any stock or business goods you've taken for yourself needs to be added to the pot.
- Additional Income: Don't forget the other ways you make money, like bartering, part-exchanges, or even gifts you make to other businesses.
It's vital to track all your income streams. For instance, if your business is involved in selling online courses in the UK, all that revenue contributes directly to your turnover. On the flip side, you should exclude any sales that are VAT-exempt, like providing insurance or Royal Mail postage services.
A Practical Example of the Rolling Calculation
Let's make this real. Imagine you're a freelance consultant, and your income goes up and down each month. If you only check your total turnover at your business year-end in December, you could be in for a nasty shock.
Instead, you need to get into the habit of a rolling check. At the end of May, for example, you don't just look at what you earned in May. You calculate your total turnover from 1st June of the previous year right up to 31st May of the current year. Then, at the end of June, you do it all again for the period from 1st July to 30th June.
This forward-looking approach is the secret to managing VAT proactively. It stops the threshold from being a sudden cliff edge and turns it into a predictable milestone you can prepare for. It removes the stress and potential penalties that come with accidental late registration.
By making this a monthly habit, you’ll always have a crystal-clear picture of where you stand. It gives you the breathing room to make smart decisions—do you need to raise your prices to absorb the VAT, or should you start preparing your clients for the change? This ensures a much smoother transition when the time comes to register.
The Hidden Dangers of the VAT Cliff Edge
While the small business VAT threshold is meant to give small companies breathing room, it unintentionally creates a dangerous hurdle for growth known as the "VAT cliff edge." This isn't just some accountant's jargon; it's a very real and often painful barrier that can stop a thriving business dead in its tracks.
Think of it this way: a talented freelance consultant is doing great, and her turnover is climbing nicely towards the £90,000 mark. As she gets closer, she faces a brutal choice. Cross that line, and she either has to suddenly slap an extra 20% on her invoices or take that hit directly from her profits.
Faced with the prospect of either pricing herself out of the market or watching her profit margins evaporate, she starts turning down work. It seems like a sensible defensive move, but what's really happening? She's actively capping her own success. That's the cliff edge in action—a powerful disincentive to earn even one more pound.
The Bunching Effect
This isn't just a one-off story; it’s a recognised pattern of behaviour. So many businesses deliberately keep their turnover just below the threshold that it creates a statistical pile-up, or "bunching," right before the limit. This isn't just clever paperwork; it's businesses making conscious, real-world decisions to stop growing.
In fact, data from 2021/22 showed a striking cluster of 21,752 businesses with turnovers between £84,000 and the £85,000 threshold that was in place at the time. Research confirmed this wasn't just a reporting quirk—it was the result of businesses genuinely scaling back their activities to avoid the hassle and cost of VAT registration. You can dive deeper into this topic by reading more research on how the VAT cliff edge impedes small businesses.
This pressure puts any business owner approaching the threshold in a tough strategic spot.
The Two Tough Choices
When you find your business standing on that cliff edge, you're left with two immediate and frankly unappealing options:
-
Hike Your Prices: You can pass the cost on by adding the standard 20% VAT to your prices. This can be fine if your customers are other VAT-registered businesses, as they can usually claim it back. But if you sell directly to the public (B2C), a sudden 20% price increase can send customers running to your competitors.
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Absorb the Cost: The other route is to keep your prices the same and pay the VAT out of your own pocket. This means your net income from every sale instantly drops by a sixth. For many small businesses, that kind of hit is simply not sustainable.
The VAT cliff edge forces a choice between becoming more expensive or becoming less profitable. This critical decision point highlights why understanding the small business VAT threshold is not just about compliance, but fundamental business strategy.
Getting Registered for VAT with HMRC
So, you’ve hit the VAT threshold. Take a breath. This isn’t a cause for alarm, but it is a signal that you need to take action. Knowing exactly what triggers a compulsory VAT registration is your first line of defence against stress and expensive mistakes.
The main trigger is what’s known as the 'historic test'. This kicks in once your taxable turnover climbs over £90,000 within any rolling 12-month period. The moment you cross that line, a 30-day countdown to register with HMRC begins. For example, if your sales tipped you over the threshold on 10th June, the crucial date is the end of that month (30th June). From then, you have until 30th July to get your registration sorted.
The Two Triggers You Need to Know
But that's not the only tripwire. There's also a 'future test' to keep an eye on. This applies if you have good reason to believe your taxable turnover will shoot past £90,000 in the next 30 days alone. This often happens when you land a single, substantial contract. If that's your situation, you must register by the end of that 30-day period.
Whichever trigger gets you, the registration process itself is handled online through the GOV.UK website. To make it a smooth ride, it's best to gather all your information beforehand.
You’ll need to have these details at your fingertips:
- Your business name, address, and contact info.
- Your Unique Taxpayer Reference (UTR) number.
- A description of your business activities and your SIC code.
- Your turnover figures and the exact date you crossed the threshold.
- Your business bank account details.
A word of advice from experience: don't leave this to the last minute. While the online portal is fairly user-friendly, pulling together all the correct documents and figures can take longer than you think. Give yourself plenty of time to avoid a frantic rush and potential slip-ups.
What Happens After You're Registered?
Getting your VAT number isn't the end of the story; it’s really just the beginning of a new chapter in your business administration. From your official registration date, you are legally required to start charging VAT on all your relevant sales.
This means a few things need to change in how you operate:
- Issue Proper VAT Invoices: Every invoice you send must now clearly display your VAT registration number and break down the VAT amount being charged.
- Keep Digital Records: All VAT-registered businesses fall under the Making Tax Digital (MTD) rules. This means you have to keep your records digitally using MTD-compatible software.
- File Quarterly Returns: You'll typically need to submit a VAT return to HMRC every three months. This report summarises your total sales and purchases, calculates the VAT you've collected versus what you've paid, and determines how much you owe HMRC.
Getting ready for these changes before you register is key. It helps you handle the operational shift smoothly instead of just ticking a box. This proactive mindset turns what feels like a regulatory burden into a well-managed step in your business's growth journey.
Making a Strategic Decision About VAT Registration
Approaching the small business VAT threshold isn't just another box to tick on your admin list; it’s a genuine crossroads for your business. The decision isn't always as simple as registering once you hit the magic number. In fact, the smartest business owners start thinking about their options long before they're legally required to act.
For some, registering for VAT voluntarily—even when their turnover is well below £90,000—can be a surprisingly powerful move. Think about it: if your clients are mainly other VAT-registered businesses (B2B), they can simply reclaim the VAT you add to your invoices. It doesn't actually cost them anything. But for you? It unlocks a major advantage: you can now reclaim the VAT on your own business purchases, from that new laptop and software subscription to stock and your accountant's fees.
This ability to reclaim VAT can significantly improve your cash flow and, let's be honest, it often makes your business look more established and professional. Of course, the trade-off is that you now have to charge VAT on all your sales and handle the paperwork that comes with it.
Weighing Your Strategic Options
On the flip side, what if your customers are the general public (B2C)? Slapping an extra 20% on your prices could put you at a serious disadvantage. This is the point where many business owners get creative and actively manage their turnover to stay just under the threshold, maybe by taking on fewer projects or simply working fewer hours towards the end of their financial year. While this keeps your pricing competitive, it can also put a ceiling on your growth.
The decision is made even more complex when you look at the recent history. The UK's VAT threshold was frozen at £85,000 from 2017 right up until the 2024 increase. If it had kept pace with inflation, experts estimate it would have been closer to £103,000 by 2023. This freeze effectively dragged thousands of growing businesses into the VAT system earlier than expected, piling on compliance costs. You can discover more insights about the frozen threshold on tax.org.uk to understand the full picture.
This helpful image breaks down the core question every small business owner faces as their turnover starts to climb.
As you can see, the first question is always whether your taxable turnover has crossed that legal line, which then determines your next steps.
To help you figure out the best path for your own business, I've put together a simple framework. It lays out the three main choices: compulsory registration, voluntary registration, or intentionally staying under the threshold. Each route has its own pros and cons, which really depend on your specific circumstances.
VAT Registration Decision Framework
| Action | Best For Businesses That… | Key Advantages | Potential Disadvantages |
|---|---|---|---|
| Compulsory Registration | Have a taxable turnover that has exceeded the £90,000 threshold. | Can reclaim VAT on purchases; appears more established. | Must charge VAT, increasing prices for B2C clients; more admin. |
| Voluntary Registration | Serve mainly VAT-registered (B2B) clients and want to reclaim VAT on costs. | Improves cash flow by reclaiming input VAT; enhances business image. | Obligated to handle all VAT admin and reporting, even with low turnover. |
| Staying Under Threshold | Primarily serve the general public (B2C) and are sensitive to price increases. | Keeps prices competitive; avoids VAT administration. | Can't reclaim VAT on expenses; may require limiting business growth. |
Ultimately, there's no single "right" answer. The best strategy is the one that aligns with your business model, your customer base, and your ambitions for growth. Take the time to weigh these options carefully before you're forced to make a snap decision.
Answering Your Key VAT Threshold Questions
Even after you've got your head around the basics, a few tricky questions about the small business VAT threshold can linger. That’s completely normal. This final section is designed to tackle the most common and practical queries that pop up for business owners, giving you straightforward answers so you can manage your VAT with confidence.
Think of it as a quick-fire Q&A to clear up any final doubts you might have. We'll walk through some common scenarios and worries, framed from a business owner’s point of view.
What Happens If I Register for VAT Late?
Let's be blunt: missing your VAT registration deadline can be an expensive mistake. If you fail to notify HMRC on time, they can hit you with a 'Failure to Notify' penalty. This isn't just a slap on the wrist with a fixed fee; it’s a penalty calculated as a percentage of the VAT you owe from the date you should have registered.
The longer you leave it, the higher that percentage can climb, which makes acting fast absolutely critical. On top of the penalty, you're still on the hook for all the VAT you should have been charging during that period. This often means you have to pay it out of your own pocket, since you can't realistically go back to past clients and ask for more money.
The single best way to avoid this financial headache is to proactively monitor your rolling 12-month turnover. It keeps you in control and prevents a stressful, costly scramble to get compliant.
Is the VAT Threshold Based on Profit or Sales?
This is one of the most important things to get right. The VAT threshold is based entirely on your VAT taxable turnover—that's your total sales revenue from goods and services that aren't VAT-exempt. It has absolutely nothing to do with your profit.
Here’s a simple example. Imagine your business brings in £95,000 in sales but has £80,000 in costs. Your profit is a fairly modest £15,000, but because your turnover is over the £90,000 threshold, you must register for VAT. Only looking at your profit margin is a classic, and often costly, oversight.
Should I Register for VAT If I Am Below the Threshold?
You certainly can, and for some businesses, it's a very shrewd move. This is known as voluntary VAT registration.
Before you jump in, here are the key things to think about:
- Who are your customers? If you mainly sell to other VAT-registered businesses, they can simply reclaim the VAT you charge them. To them, it's cost-neutral, so your prices don't really go up.
- What are your expenses? The biggest perk for you is being able to reclaim VAT on your own business costs—things like software, stock, new equipment, or professional fees. This can give your cash flow a serious boost.
- Are you ready for the admin? Once you're registered, you have to play by all the VAT rules. That means charging VAT on your sales, keeping digital records for Making Tax Digital (MTD), and filing regular VAT returns.
You really need to weigh the potential savings against the extra administrative work.
What Is the Difference Between Zero-Rated and Exempt Sales?
This is a subtle but crucial detail for getting your turnover calculation right. While both mean your customer doesn't pay VAT at the till, HMRC treats them very differently.
- Zero-Rated Sales (0% VAT): These are sales that are technically taxable for VAT, but the rate is set at 0%. Think of things like most food, books, and children's clothing. Critically, the value of these sales does count towards your £90,000 taxable turnover. If you're registered, you can also reclaim VAT on any costs related to making these sales.
- VAT-Exempt Sales: These sales fall completely outside the VAT system. Examples include insurance, postage stamps, and some financial services. The value of these sales does not count towards your taxable turnover. If all you make are exempt sales, you can't register for VAT at all.
Getting this distinction right is key to calculating your turnover correctly and knowing exactly when you need to act. For a different perspective on how these rules can affect small operations, you might find this article on understanding freelancer VAT challenges in the Netherlands an interesting read.
Navigating VAT can feel complex, but you don't have to do it alone. The team at Stewart Accounting Services specialises in taking the stress out of VAT, bookkeeping, and tax for businesses across the UK. Let us handle the compliance so you can focus on growth. Contact us today to see how we can help.