VAT registration threshold: the two tests that catch small businesses out

For many small businesses, the VAT registration threshold is the most important number in the tax system. Cross it and you must add VAT to your prices or absorb it from your margin, file returns and keep digital records. Because it works as a hard line rather than a gradual slope, business groups and tax commentators often call it a growth cliff edge. This guide sets out what the official GOV.UK guidance says, how to track your position, and what to do this week so that you are never caught out.

The figures you need

According to GOV.UK, you must register for VAT if your taxable turnover is more than £90,000. The threshold rose from £85,000 to £90,000 on 1 April 2024, and the deregistration threshold rose from £83,000 to £88,000 on the same date. GOV.UK lists £88,000 as the level below which a registered business can choose to cancel its registration. Cancelling is optional, not required.

The government's own paper on the change said it keeps an estimated 3.2 million small UK businesses out of VAT. It also estimated that about 28,000 fewer micro businesses would need to register in 2024 to 2025.

What counts as taxable turnover

Taxable turnover is not the same as profit, and it is not quite the same as total sales either. GOV.UK describes it as the total value of everything you sell that is not VAT exempt or out of scope. That includes:

• standard-rated, reduced-rated and zero-rated sales
• goods you hire or loan out
• business goods used for personal reasons
• goods you barter or give away
• certain services where the reverse charge applies

Zero-rated sales still count towards the threshold, which surprises some owners. Exempt and out-of-scope sales do not count. If you only make exempt or out-of-scope sales, you do not need to register, although GOV.UK notes a separate rule for Northern Ireland businesses buying more than £90,000 of goods from EU VAT-registered suppliers in any 12 months.

The two tests that can trigger registration

There are two separate tests, and you need to watch both.

The 12-month test. If your taxable turnover over the last 12 months is over £90,000, you must register within 30 days of the end of the month in which you went over. GOV.UK gives an example: if you go over on 15 July, you must register by 30 August, and your registration takes effect on 1 September.

The 30-day test. If you expect your taxable turnover to exceed £90,000 in the next 30 days alone, you must register by the end of that 30-day period. The effective date is the day you realised. GOV.UK's example is a £100,000 contract agreed on 1 May: you register by 30 May, with an effective date of 1 May.

The 12-month figure is a rolling total, not a tax year or a calendar year. That means you should check it every month, not once a year when your accounts are prepared.

What happens if you register late

GOV.UK states that if you register late, you must pay VAT on the sales you made since the date you should have registered. You may also face a penalty, depending on how much VAT you owe and how late you are. The practical sting is the first part: if you did not add VAT to your prices during that period, you may have to pay the VAT out of money you have already taken, which can wipe out a large part of your margin.

Options if you only go over temporarily

If your turnover goes over the threshold only temporarily, for example because of a one-off job, you can apply for a registration exception. HMRC will write to confirm whether you get one. If you do not, HMRC will register you. Do not assume an exception will be granted: apply in good time and keep the evidence of why the spike is one-off.

You can also register voluntarily below £90,000. This can make sense if most of your customers are VAT-registered businesses, because they can usually reclaim the VAT you charge, and you can reclaim the VAT on your own costs. It can make less sense if you sell mainly to consumers, who cannot reclaim it. Your accountant can model both cases using your real figures.

Why online sales make this harder to watch

If you sell through a website, marketplace or app, your turnover can rise quickly and from several places at once. A good month on your own shop, plus a marketplace promotion, plus a wholesale order can add up faster than you expect. A few practical points:

• Pull a rolling 12-month figure from your accounting software or ecommerce platform, not a figure you remember.
• Separate your standard-rated, zero-rated and exempt sales so you know which count.
• Include every sales channel, not just the main one.
• Add a note for any large orders or contracts you expect, because of the 30-day test.

If your shop or ordering system is built well, this report can be automatic. We build ecommerce sites and automations that send a monthly turnover alert to the owner, so the number is never a surprise.

What to do this week

• Work out your taxable turnover for the last 12 months, using GOV.UK's definition above.
• Set a reminder to repeat the calculation on the first working day of every month.
• Choose an internal warning level, for example 80% of the threshold, at which you speak to your accountant.
• Check any big orders or contracts coming in over the next 30 days against the 30-day test.
• If you are close, decide in advance whether you will raise prices, accept a lower margin or restructure how you sell, with professional advice.
• If you are already registered and below £88,000, ask your accountant whether cancelling would actually help you, since it is optional.

The bigger picture

Commentators disagree about whether the threshold should be higher, lower or phased in, and that debate will continue. For a business owner, the useful thing is that the rules as they stand are clear and checkable. Know your rolling figure, watch both tests, and register on time. A small amount of monthly attention is far cheaper than a bill for VAT you never charged.

This article is general information, not tax advice. Check the current figures on GOV.UK or with your accountant before you act.